Don't Over-Leverage - Over-Leverage in Spread Betting
One of the tendencies for traders when dealing with leveraged investment styles is to over-leverage. In spread betting, this takes the form of placing a wager that's far too high in comparison to the total trading account size, and it's all too common for traders to want to make the most money they possibly can in the shortest period of time possible. Succumbing to greed is a central reason why traders fail, and it can cause all sorts of problems in a matter of minutes when you're too highly leveraged. So how should you best handle this double-edged sword, and at what level should you be trading to keep within safe limits?
As a rule of thumb, you shouldn't be trading any more than between 0.1% and 0.2% of your total trading account per point on any one transaction. This builds in enough scope to allow you to place multiple transactions and for some of those to work against you with less than devastating consequences, while also taking account of the need to preserve your capital for the medium term. This is especially important when you're just starting out in your trading career, because there are no guarantees that you will earn more than you lose in the early days of your spread betting journey.
Whenever you're deciding how much to bet on a particular transaction, it's vital to bear in mind how spread betting transactions are calculated. Your stake is multiplied by the difference between the price at which you entered the position and the price at which you closed the position (either voluntarily or involuntarily, courtesy of the broker cutting their own losses while they can). So, a 10-point movement means 10x your stake, in either direction.
Because of this inherent structure in spread betting as a transaction, it is important that you make sure that you have enough breathing space within your account to avoid running into difficulties if one or two positions fall into the red. For an account that is overleveraged, with transactions account for 5%, 10% or greater of the investment capital available, it only takes a slight blip in a market to cause serious problems.
A common misconception for inexperienced spread bettors and other leveraged investors is to assume that losses are somehow limited to the amount available in deposit. So, the logic goes that if you invest £100, the most you can possibly lose is your £100. With share dealing, this is generally the case, and your liability stops when your shares become worthless.
However, for leveraged spread betting, you are actually liable for the total extent of your losses, whether that's more or less than your available balance. If its more than the amount you have on balance, you might notice that your other positions are closed automatically as the broker tries to claw back some of your debts. If your open positions are insufficient to cover your liability, you might find you get pursued in the real world for the sums you owe.
This is why it is so important to keep a panoramic perspective of what leverage can do - it can win you a lot of money, but it can also cost you your car, your possessions or even your family home. Don't get greedy and push for the sky - while you might hit the big time, you'll be dicing with your total worldly wealth, however large or modest, in the process.