5 Financial Spread Betting Risks
Whilst financial spread betting carries the potential for sizeable gains, it is not without its pitfalls. These risks may seem obvious to anyone with market knowledge but are fundamental to both a successful trading strategy and choosing a financial spread betting provider suited to your style.
As a leveraged product, financial spread bets offer the opportunity of making profits or incurring losses in excess of your initial deposit. This gearing means that you need to assess your potential exposure every time you open a trade.
Setting a form of risk management such as a stop loss or guaranteed stop loss can help to minimise large losses and should be a part of every trader’s arsenal.
- Market Volatility
This should be obvious, but you should always analyse the volatility of a particular market. Price volatility together with leverage may increase the chance of taking a large hit.
- Gapping Risk
Gapping is when something such as an environmental disaster, geopolitical event or unexpected corporate announcement affects a derivative’s price when no trade has occurred. Gapping happens most often when the market is closed. Upon re-opening, the price may have dropped (‘gapped down’) to a level below your stop loss, causing sizeable losses.
The likelihood of gapping is increased if you like to trade in illiquid markets because low market volumes can cause prices to fluctuate more widely. Setting up guaranteed stop losses is a crucial way of minimising gapping risk.
- Timeframe Risk
Particular markets can be more volatile during certain parts of the day or dates in the year than at other times. Keeping a financial calendar to hand and using the most reliable news feeds can prevent you from falling foul of events.
- Variable Spreads
Trading on a market with variable spreads means that your spread betting broker can change the size of the spreads when it suits them, potentially increasing the cost of trading and allowing them to stop you out. Whilst some traders seek to profit from variable spreads, many find that fixed spreads allow for more confident trading decisions and better risk management.
Risk Warning: Financial spread bets are leveraged products. Losses may exceed deposits.