Your money management process is the part of your strategy that will keep you from wiping out your spread betting account. Even the very best spread betting strategies will experience an extended run of consecutive failed trades. If you stand to lose a quarter of your account on a single failed trade, then it is statistically very likely that you will wipe out your account in no time at all. When all you need is a run of four failed trades in a row, probability is not on your side.
You need to protect your capital at all costs. Size your positions so that it would take an exceptionally long, and therefore statistically very unlikely, run of trades to wipe you out. Never risk more than 1% of your trading account on any one trade. If you have an account of £5,000 this means that your maximum risk on any one trade is £50. Following this approach, your account will still be intact in years to come.
As you gain profits, your account size will grow. This in turn means that your maximum risk can also grow. If you double your account to £10,000, then your maximum risk is now £100 per trade.
We use this maximum risk to work out the stake we should use on any given financial spread bet. We have discussed in previous articles the importance of knowing your stop loss position before you enter a trade. We use the initial stop loss position to calculate the maximum number of points that we could lose if the trade goes wrong. Once we have figures for our maximum account risk (one percent of our account capital) and our maximum point loss (number of points between the entry and the stop loss) we can calculate our stake size. The stake size is the maximum account risk amount divided by the maximum point loss.
Here is an example to clarify this method:
• We want to go long on the FTSE 100 Daily and our buy order executes at 5274. By reading the chart we see that the best place to put our stop is at 5252 meaning we have a maximum point loss of 22 points.
• Our account balance is £4976, so our maximum risk on any one trade is £49.76.
• We divide our maximum risk by our maximum point loss to get our stake size of £2.26. Most spread bet companies deal in whole number stake sizes, so our position for this bet is rounded down to £2 a point.
What this money management strategy does for your account is that it forces you to be careful and to place bets within your comfort zone. You are far less likely to be riding an emotional roller coaster over one percent of your account being at risked than you are over twenty-five percent of your account.
As your account grows over time, so too does your maximum risk amount. Crucially, your capital remains protected at all times. If you hit a run of bad trades, your maximum risk amount decreases as the account balance decreases. This further protects your account balance and maintains the likelihood that you will still be spread betting for years to come.