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Investing for income with Spreadbetting and managing your risk with it.

Investing for income with Spreadbetting and managing your risk with it.

Spreadbetting can be an exciting, adrenaline-fuelled hobby for many casual gamblers who havea ‘gut-feeling’ that something will happen in a financial market, sports game or political election. The fact that you can spreadbet on almost anything creates countless opportunities for those who have a general understanding of their market to place a bet with a reasonably high-probability of success.

There is a difference, however, between those who spreadbet as a pure gamble, based on a hunch, than those who spread bet for a living (also known as investing for income) looking to make profitable gains from well-planned opportunities on a daily basis.

The approach, for those who spread bet as a seriousmeans to accumulate capital, differs considerably from that of the casual gambler in terms of risk management.

All professional traders have definitive strategy and disciplined entry and exit plan for each trade that they take. This can limit their risk and mathematically give them a winning edge which may allow them to lose more trades than they win but still remain profitable in the long run.

Risk management is essential to all serious traders and those who have a solid understanding of this are more likely to be profitable. Good risk management in spreadbetting involves the strategic use of stop-losses or a disciplined approach to cutting losses which has the central function of preserving a trader’s capital.

Capital preservation is the single most important factor in becoming a successful trader and spreadbetting is no exception. Due to the vast range of markets and bets available to traders, the temptation is to risk more on those trades that appear to be higher-probability and therefore overexpose your account when you believe that you are right.

The danger here is that the potential for you to be wrong is also fairly high and several wrong decisions can seriously affect the value of your account.

The mantra often told to new traders is never to expose your account by more than 2-3% of risk. For spreadbetting this would mean placing a stop-loss which would limit the losses that you could potentially incur to only 2-3% of your current account. Many new traders find this difficult as it means that the profit margin will perhaps also only be 2-3%.

This rule will, however, will allow disciplined traders to only risk a small fraction of their available capital and, in the event of a string of losing bets, will allow an individual to continue trading.

Although the profit margins may be lower than those expected and the excitement that a ‘big win’ can bring, it does not take a mathematical genius to realise that a daily expansion of an account by 2-3% will be considerably profitable over the course of a year.

Small gains and small losses are the key to learning how trade successfully and investing for income, by maintaining an active account and learning how disciplined professional traders achieve their success.

Article courtesy of Andy Richardson.

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