The Mechanics of Money Management

20money280813You must use the concepts of money management to help you evaluate the optimum amount that you can risk per spread bet whilst providing maximum protection for your capital.

For example, if you expose too much of your account balance on a single spread bet then your possible losses could be so extensive that they could prevent you from attaining the full benefits of your strategy’s positive expectancy over the long haul.

Instead, if you deploy a good money management strategy together with the following trading maxim then you will provide a better spread betting environment to progress your skills and knowledge in small steps of incremental risk. The often quoted maxim is ‘do not risk too much of your equity at any given time‘.

For instance, you must appreciate that after you have designed a spread betting trading strategy which boasts a positive expectancy, you must then incorporate well-tested money management concepts into it. This is because this tool will be the biggest influence in assessing the speed about how fast your account balance will grow.  You will find that a good money strategy can transform a spread betting strategy possessing just a mediocre expectancy value into a money making machine.

 

How to Limit Your Losses

Expert consensus recommends that spread betting novices should utilize a money management strategy that advises that they never risk more than 2% of their total capital on any single spread bet. You can keep the risk for each trade within this specification by implementing a stop-loss order everytime you open a new spread bet. A stop loss specifies the distance measured in points that you will allow price to advance against your position before you close it.

Consequently, you can determine the size of your maximum loss by multiplying the distance between the opening price of your spread bet and the value of your stop loss together with the amount your wager per point. You must aim to ensure that the size of your maximum loss does not exceed 2% of your total capital. For example, imagine that you have a fund totalling £10,000. You implement a long spread bet based on the EUR/USD which has an opening value of 1.3300.

You then activate a stop loss so that it is positioned 50 points away from your opening value at 1.3250. Consequently, in order to limit your maximum loss so that it complies with your 2% stipulation, you must restrict its size to £200. This means that you must only risk a maximum of £4 per point.

 

Testing Your Money Management Strategy

After you have obtained a positive expectancy value for your spread betting strategy and have incorporated sound money management concepts into it, you should then test this tool using precisely the same configurations that you used under demo conditions. You must be aware that live accounts present additional difficulties such as slippage, re-quotes and larger spreads. Consequently, you need to assess the impacts that such factors will have on the expectancy value of your strategy.

You should then seek to optimize the performance of your trading strategy by altering just one of its configuration settings at a time. After each adjustment, you must then re-evaluate the win-to-loss ratio and expectancy value of your strategy in order to assess any improvement in performance.

 

The Importance of Money Management

You need to appreciate that spread betting is a very risky activity and, as such, you must provide optimum protection for your account balance as a top priority. This is because spread betting has the ability to generate very high levels of volatility. In addition, all spread betters will have access to high leverage facilities. When you combine these two attributes then you have a very dramatic trading environment that can cause you significant financial losses unless you proceed with caution.

You can counter such problems by utilizing the concepts of risk and money management because this tool can minimize your risk exposure. In addition, you must always only trade using financial reserves that you can afford to squander.

You must realize that all new business activities contain an element of risk making the possibilities of significant financial losses a serious consideration. You can define these threats as any factor, issue or situation that can generate negative influences on the performance of your spread betting activities.

For example, selecting a reputable spread betting broker such as Capital Spreads will be one of the first important decisions that you will have to make before you are able to commence spread betting. You will have to undertake careful research into all your potential candidates when you are making your choice. For instance, you should confirm their reliability and good-standing by verifying that they are members of official regulatory authorities. In addition, you need to validate that they have world-class proprietary price feeds that are able to supply you with very competitive spreads.

You will then enjoy excellent leverage facilities that can be as high as 100:1 or more once you have enlisted with a spread betting broker and you have made your first deposit. Consequently, you will then be able to execute spread bets of considerable worth backed by just small deposits. For instance, if your leverage is 100:1, you could then open a new spread bet worth $100,000 with a deposit of only $1,000.

However, you need to realize that you could lose all your equity very quickly if you do not exert care because the risks involved are very large. Consequently, you are advised to risk a maximum of 2% of your entire balance per trade by utilizing a sound money management policy.

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