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Manage your risk when trading the markets

David Jones
For many years, trading the financial markets and spread betting in particular, was felt to be the reserve of City professionals. But advances in technology over the last decade or so and an increased awareness of the impact that the gyrations of financial markets can have on our everyday lives have meant that financial trading is moving more and more into the mainstream with every year that passes.

Even among those who have never tried it, there appears to be a lot of curiosity about financial spread betting, resulting in a wide range of opinion at both extremes. Some people think that it is simply an easy way to make money while others are petrified of the risk that a small movement in a market can have an impact on your profit or loss.

While of course spread betting is not suitable for everybody, it does not necessarily have to be such a rollercoaster ride of emotions, leaving you glued to the screen 24 hours a day worried about how the latest Chinese trade figures will impact your long FTSE or short pork bellies trades.

There are plenty of tools these days that are available – and should be used – to help you manage your risk and free up your time to do something more productive than watching numbers change.

For example, stop losses have been around for a long time. And with the advent of guaranteed stop losses, you can absolutely nail down your maximum risk right from the start of the trade, regardless of what effect external events, such as those Chinese trade numbers, may have on your position.

Another important consideration is the size of your trade. If you find that you are swinging from elation to depression every time the Marks&Spencer share price moves by a penny, then it could be the trading gods’ way of telling you that maybe you should scale back the size of the position.

Figuring out the direction that a market is likely to take can be tricky enough at the best of times without the additional stress of trading too big. Trading at a level that is appropriate for your risk capital can help you look at the markets from a balanced viewpoint and avoid being caught up in the minute-by-minute swings of a stock price.

To help you out, there are plenty of educational resources available from spread betting companies – at IG Index, for example, we have around eight hours of online videos on our website, which include explanations on how spread betting works and how to manage the risk as well as looking at different markets such as foreign exchange.

If the idea of trading financial markets has ever appealed to you, there is a wealth of information out there and you can dip your toe in at a level that suits your own particular approach to risk.