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5 Risks of Financial Spread Betting

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Financial spread betting is all about finding the right balance between risk and reward, knowing when to up your stake and when to close your trade. The following spread betting risks may seem obvious, but should always be at the front of your mind.

Gapping Risk

Gapping is when a significant market-moving event affects an instrument’s price whilst there has been no trading. This usually happens when a market has closed. As the market re-opens for trading, the price has dropped (‘gapped down’), potentially below the level of your stop loss, incurring large losses. Illiquid markets are particularly liable to gapping risk as low liquidity can lead to more volatile price movements. A guaranteed stop loss is a vital tool for managing gapping risk.

Leverage

Financial spread betting is a leveraged product, offering the opportunity for profits (or losses) many times greater than the initial deposit you make. This makes it essential to know your total exposure to a market prior to placing a trade. Stop losses and guaranteed stop losses should be a part of every trader’s risk management strategies.

Timeframe Risk

During particular times of the day or specific dates in the year, certain markets may see more dramatic price movements than usual. The freshest news feeds and checking an economic calendar each morning should keep you one step ahead of events, or at least better equipped to deal with them.

Market Volatility

Self-evident to the experienced trader, though too often forgotten in the heat of the moment. High leverage combined with price volatility massively increases the likelihood of taking a large hit.

Variable Spreads

With variable spreads your spread betting broker can adjust the size of the bid-offer spread when it benefits them, potentially adding to the cost of trading and giving them the opportunity to stop you out. It should be noted that some spread bettors find success using variable spreads, but many prefer fixed spreads for risk limitation.

 

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