Money Management Tips
An often-overlooked area of managing your financial spread betting career is money management. In a business that revolves almost entirely around dealing in money, it is surprising that so many traders pay little attention to the state of their trading accounts and their wider finances, with apparently no thought for the medium and long-term. Yet the frequency of poor money management is no excuse for this fatal trading flaw, and adopting a sensible, reasoned approach to managing your trading finances is critical to your success or otherwise.
In spread betting, as with any other form of trading, your cash is the lifeblood of your earnings - without ongoing investment in your trading positions, you can be sure that your earnings will quickly dry up. At the same time, you will notice a constant stream of losing trades, sapping your resources and applying even more pressure on you to deliver winning trades. Don't be disheartened by this - even the best traders regularly lose. Markets are unpredictable and losses inevitable - the trick lies in ensure that at least 20% of your trades win, and win big enough to at least offset the damage of the remaining 80%. This takes a careful approach to money management, and an understanding of your trading limits.
Spread betting is highly leveraged in both directions. You might win £100 on one trade and lose it again just as quickly on another, because every point is another multiple of your stake in your favour, or against your trading balance. That means you need to seriously think about how much you can afford to stake on a single transaction, and how many transactions you want to have open at any one time.
As a rule of thumb, a trading account with £500 shouldn't trade at more than £1 a point. In terms of the number of open positions, you should be looking at no more than 5 or 6. This might seem a little cautious, but the numbers in spread betting can be deceptive. If 6 positions each lose 10 points, that's £60 off of your trading balance - 12% of your account wiped out in one day.
If those same positions lose 20 or 30 points, you're looking at real problems. Remember that managing your money isn't a short-term cash flow thing - it's a long-term consideration that you must constantly bear in mind, and anything you lose now won't necessarily be available for you to trade in six months' time. Therefore, it's imperative to make sure you don't get greedy and over think it - slow and steady most definitely wins the race.
After all, if you invested your £500 in a top earning savings account at even an unrealistic 10% yield, you'd only be looking at a return of £550 (before tax) in the year - with cautious spread betting, it can be easily possible to yield a couple of percent a day, and via the magic of compound interest, you can quickly build your trading capital.
Finally, it's important to remember that spread betting doesn't take place in a vacuum, and even if you're trading numbers on a computer screen, you should constantly bear in mind that you're trading real cash, and your on-screen liability can and will follow you into the offline domain.
Don't take any stupid risks that you can afford - it's not worth it. Patience will pay off, and sensible money management will ensure you're still in the game in years to come, and in a strong position to take advantage of the more lucrative opportunities that present themselves.