May 31, 2011
Determining Your Risk When Spread Betting The Forex Markets
Many people trade the forex markets using a traditional forex broker, but I am well aware that lots of people, particularly here in the UK, like to trade using a spread betting company instead. I nearly always trade this way and it's a fairly simple way to trade because you don't need to worry about lots or anything like that. You simply choose your stake, ie £1 or £10 per point for instance, and enter your position long or short.
Anyway in this article I want to discuss how you can determine your risk when spread betting the forex markets, and subsequently how much you should be staking per point. It is quite straight forward, but it can be slightly difficult if you are new to spread betting.
The first thing you need to do is to determine how much of your account you are prepared to risk per trade. The common advice is to risk no more than 2-3% per trade, and I myself rarely risk any more than this except on very rare occasions where I am extremely confident about a particular position.
So let's assume that you have £5000 in your spread betting account and you are prepared to risk 3% per trade. Your maximum loss from this trade is therefore £150 (3% of £5000).
The next step is to look at your stop loss for this particular set-up. If you are planning to enter a position with a stop loss set at 50 points, then your stake would be £3 per point because 50 points @ £3 per point would give you a maximum loss of £150, which is the 3% that you were prepared to risk on this trade.
Similarly if you intend placing a stop loss just 15 points away, then you would therefore be looking to enter a position at £10 per point to give you the same maximum loss of £150.
Of course there is always the chance that you may not be automatically closed out at this exact stop loss due to slippage, in which case your loss may be slightly more than £150. However you can hopefully see the point I am trying to make.
In summary then, if you want to determine your risk when spread betting, you simply work out how much you are prepared to lose based on a percentage of your capital, and then determine how many points away you are going to place your stop loss. You can then work out your stake per point fairly easily and enter your trade.