Spread Betting Market Volatility and How to Handle It

LONDON, November 5, 2010 /PRNewswire-FirstCall/ -- In financial spread betting (http://www.cityindex.co.uk/spread-betting/), market volatility creates both risk and opportunity. For instance, it is not uncommon for spread betting indices such as FTSE 100 and Wall Street to move by more than 100 points during the day, constantly fluctuating as they do so. Whilst trading on these larger price movements can result in profit, it can also lead to significant spread betting losses if traders do not adjust their spread betting approach accordingly.

Stop losses

Ultimately, protecting your capital is the most important thing. As the most efficient risk management tool available, a guaranteed stop loss offers a greater level of spread betting security than a standard stop loss, guaranteeing to close your trade at the exact trigger value you have set regardless of underlying market volatility and the gapping that can occur as a result.

For example, if you placed a spread bet of GBP1 per point on the UK 100 at 5000 and were only willing to lose GBP200 on the trade, you would set up a guaranteed stop loss order at 4800. This would mean that if some bad company earnings happened to push the index past 4800 straight to 4750 (market gapping), the trading platform would still close the spread bet at 4800 to protect you from any further losses. Guaranteed stop loss orders incur a small premium for this extra insurance to your financial spread betting. Learn more about stop losses and spread betting risk management at http://www.cityindex.co.uk/spread-betting/how-to-manage-risk.aspx.

Hedging with CFD trading

Another way to preserve your spread betting balance in the face of market volatility is to hedge your spread bets with CFD trading ( http://www.cityindex.co.uk/cfd-trading/what-is-cfd-trading.aspx). For instance, if you believed that your existing 'long' spread bet on Vodafone worth GBP5,000 in unrealised profit might lose some of its value, but wanted to keep it open in the hope of a longer-term gain, you could short sell the equivalent of GBP5,000 worth of Vodafone shares through a CFD trade. Should Vodafone share prices then fall by 5%, the loss in value of your buy spread bet would be offset by a gain in your short sell CFD trade.

Hedging will never lead directly to an overall spread betting or CFD trading profit, but it will protect your investment by ensuring that you always roughly break even. Remember, the key is to ensure that your profiting trades outnumber your deficits, so keeping your spread betting losses to a minimum in this way can make all the difference to your bottom line.

Standing aside

Remember that volatility is a necessary evil in spread betting. Without movement in the markets you cannot make a spread betting profit. There is, however, a line between a volatile market and one that is too volatile to trade. Always bear in mind that standing aside is always an option, particularly if the financial market represents too much of a spread betting risk.

Hone your approach to spread betting with a free City Index seminar. Visit http://www.cityindex.co.uk/learn-to-trade/seminars.aspx for a list of upcoming dates and topics.

Alternatively, try a spread betting webinar from the comfort of your own home or office at http://www.cityindex.co.uk/learn-to-trade/webinars.aspx.

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

*Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.

SOURCE City Index