Risk Management

Spread betting is a high risk option if you don’t have a strategy in place to manage your risk. Unlike traditional share dealing, spread betting is a leveraged product. This means that you can gain and lose much more money than you have initially deposited. It might not be suitable for every investor. And you should only risk whatever money you are prepared to lose.
The key to successful spread betting lies in good risk management. You will lose on many, if not most, of your spread bets. The way to making money is to minimise your losses when the market moves against you, and maximising your gains when it moves in your favour.
A successful trader knows his market, monitors his positions carefully, and uses different types of orders to limit his losses - such as trailing stops, and contingent orders. Spread betting companies offer a wide range of risk management tools and order types.

Stop Loss

Most spread betting companies offer stop-losses, and some apply them automatically to every bet.
You can limit the amount of money you will lose by using a stop-loss order.  It is an instruction to deal if the price becomes less favourable to you. You set a level – and if the losses reach that level, your bet is automatically closed.
Example: Let’s say you buy at £10 per point on the FTSE 100 at 5150. You are betting the FTSE will go up in value. But you are only prepared to lose £500 if the market moves in the wrong way.  This will happen if the market drops by 50 points (10x50=500) to 5100.  So you set your stop-loss  at 5100, and if the market reaches that level, your bet automatically closes.
Remember: A stop loss can be placed above or below the opening price, depending on your bet.
When you buy, you are expecting prices to rise, so you put the stop loss order below the opening price to protect you if it falls.
When you sell, you are expecting prices to fall, so you put the stop loss order above the opening price to protect you if it rises.
You can usually widen or tighten a stop loss that has automatically been applied to your account. It is often calculated taking into account how much money you have on deposit, so in some cases you may need to put in more funds in order to widen the stop loss.

Guaranteed Stop Loss

There are times when a spread-betting company will not be able to close your position at the level you have set, especially at times of market price volatility.  The market may never trade at the level you specified.  This is known as Gapping.
Example: Once again, you buy £10 per point on the FTSE at 5150. And have set your stop loss at 5100.  However, the FTSE drops first to 5125, and then to 5050. Your bet would then be closed at 5050, because the company never offered 5100 – and it was never possible to close it at that price.
As you can see this is important when the prices go up or down very rapidly. If prices are moving extremely rapidly, even if it does trade at your price for a time, it may still not be possible to close your bet quickly enough to get the stop loss price. This is known as Slippage. Slippage is the difference between your specified level and the price at which your order is transacted.
But there are protections against this. Most spread-betting companies offer guaranteed stop losses on certain products.  This eliminates any slippage, and guarantees a get-out price for your bet.  However, you will be charged extra for this – a premium which usually added to your opening price.

Limit Orders

While Stop-Losses are your safety-net against losses, there will be times when you will want to close your bet at a certain profit level. With limit orders, like stop losses, you set a price at which you want the trade to be executed, and it will be closed when prices reach that level.  This order is used to protect profits.  For example, there may be periods when you are not able to monitor your positions as closely as you would like. But you want to take advantage if the market rises to a certain point.
Example:  Let’s say you believe the FTSE is going to rise in value, and so you open your bet by buying £10 per point on the FTSE at 5150. You would be happy with a profit of £500 on this bet, which will happen if the FTSE rises to 5200 (500=£10x50). So you set a limit order at 5200, and if the market reaches this point your bet is automatically closed and you profit £500.
Remember: If you buy, expecting the market to rise, you set your limit above the opening price, and if you sell, expecting the market to fall, you set your limit below the opening price.
Note: You can have the two orders in place for the same trade.
So, in the above example, if you decide you want £500 to be the most you could lose or win, you can have a stop loss order and limit order in place to manage your exposure to the bet.

Trailing Stops

Some companies offer Trailing Stops – which automatically move the closing order when the market moves in your favour. You don’t have to manually cancel and replace the order, and monitor your positions and move your stops constantly. You just tell the company how far from the opening position you want your stop placed, and the size of the increments by which the stop can move. Trailing stops are generally not guaranteed – and are prone to slippage. They can usually be added when opening a position, or attached at a later stage.
Example:
You buy £100 per point on the EUR/USD rate at 1.2580/1.2582, choosing a Trailing Stop distance of 30 points, and a step size of 10 points.  So the stop sits 30 points below your opening price at 1.2552.
The Euro strengthens and the price rises to 1.2590/1.2592 – 10 points above your opening price. Your Stop now steps up by 10 points to 1.2562 to remain 30 points behind the new market level.   
The rally continues, and by lunchtime is trading at 1.2645/1.2647 (up another 55 points). This means your stop has automatically moved another five times to 12.612.
A surprise event sends markets tumbling down and within minutes the EUR/USD is back down trading at 1.2590/1.2592.
Your Trailing Stop takes effect and your position is closed at 1.2612.
The difference between your closing level and opening level is 30 points (1.2612-1.2582=30)
Your profit on is 30 x stake of £100 = £ 3000
With a conventional Stop Order, unless you had changed it manually, you would still be in the market.  If you decided to close the bed at this point, the difference between your closing level and opening level would be 8 points (1.2590-1.2582), and your profit  a relatively small £800.
So you can see how Trailing Stops can benefit you in a volatile market.
Remember: Trailing Stops are not guaranteed and are subject to slippage.

Opening Orders

Stop Loss and Limit orders are both closing orders – both instruct the company to close the bet at the specified price. But you can also use opening orders which allow you enter a market when prices reach a certain level. You can leave an opening order on a market to either buy or sell at a certain price.
Example: A Spread betting company is quoting Vodafone shares at 845-850. You believe that it its value is going to rise to no more than 875, and that if it does it will start to fall again. You place an opening order to sell at 875 – in other words if the price reaches 875, you want to open a new bet that it will start to fall (a sell bet).

Order Cancels Order (OCO)

This is the term for when two orders are given to a broker, and when one is executed, the other is cancelled.  A common example of this in Spread betting is if an investor has opening orders on several things at the same time, but limited money on deposit. If the opening order on one product takes effect, the orders on the others are then cancelled.

Parent and Contingent Orders

These are separate orders linked by an if/when proposition.  Contingent orders do not take effect until the Parent orders do first.

Further Reading:

1. Spread Betting Explained

2. Advantages of Spread Betting

3. A Spread Betting Example

4. Spread Betting FAQs

5. Risk Management