Keys to Successful Money Management for Financial Spread Betting

Whilst one of the mantras of spread betting is to never risk money that you can't afford to lose, that doesn't actually mean that a bettor should not treat his account protectively with the intention of making it grow. Once the money is in the account it should be looked after and not risked wrecklessly.

1. One of the major points of money management is understanding and accepting that it is not necessary to be in a trade at all times. If there is not a clear opportunity to be had then don't trade and wait for the moment when the probability of winning falls in your favour. For anyone who has played poker this is very much the same as the rule that you don't play every hand - only those where the odds are on your side.


2. A supporting guideline to Point 1 is the rule that a trader must not over-trade. Being in the market in several positions may feel exciting but if there is no rationale behind each position and the trades are being made just to 'feel involved' then the risks are unjustified. "Why am I making this trade" is the question alsways to be asked before opening a position.


3. Keep the losses small and allow the profits to run. This implies keeping a good ratio of potential win to potential loss on each bet - risk/reward ratio. A good guide is to only place bets where your realistic upside target is at least 2 or 3 times the size of the downside. In other words if you have calculated a likely target which yields a gain of 20 or 30 points, the risk to your stop loss should only be 10 points. what is critical here though is that these targets are realistic and are based on something like the average true range (ATR).
   
   Arbitrarily picking an instrument and placing a stop 10 points below the current price and a target 30 points above will lead to failure. If the price only ever moves 5 points in a day and this price has been moving sideways for the last month then neither the target nor the stop are realistic.
   
   Similarly, if the price of the instrument has been moving in a volatile fashion across a 100 point range then choosing a 10 point stop is not realistic and all that will happen is that a trader will consistently take small losses and probably very few gains.
   
   This is why concepts such as trading support and resistance are so popular. They offer identifiable ranges for prices movements and opportunities to assess how much is likely to be gained and how much could potentially be lost.


4. Never risk a disproportionate amount of money on an individual trade. Common practice is to only risk up to 1 or 2 % of the total available trading funds.
   
   One of the key factors behind spread betting is to win over the 'long term'. This is partly linked to Point 2 where winners are left to run and losers are stopped early. This means the likelihood is that a trader will have more winners than losers but that his winners will be bigger.
   
   However, if the amount risked on each bet is too large and a bettor is expecting to win say only 30% of the time say he will seriously damage his position.
   
   To demonstrate this in an extreme case. Take an account for £10,000. If 15% is risked on each bet then after 4 bets it is quite possible that all 4 were losers and the account is down to £6,000. To get back to his original position the bettor now has to increase his account size by 66% (4000/6000) just to get back to where he started. There are several impacts of this but one of the main ones is that the account is being reduced too quickly and that there isn't going to be a 'long term' in which the probability of winning can take effect!


5. Always limit the amount of your account that is at risk at any one time. Even if the 2% rule is being adhered to on the individual trades, if there are 50 trades going on at the same time, then this is £1,000 of cumulated risk. It only takes a one severe hiccup across the market to take most of this out.


6. Make a money plan. Even if this is quite basic, the fact that it exists will focus attention on it. Include such things as:
   
   
   • Current balance
   • Acceptable risk per trade
   • Acceptable open risk at any one time
   • What is the acceptable risk/reward ratio
   • Acceptable number of bets to have open at any one time


7. If you enter a bad run a losses take a break to assess what's going wrong rather than continue making the same errors over and over again. Part of the rewards of spread betting is learning how the market moves and stepping back occasionally will help with this.