Spread betting

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17. Strategy - cutting losses

If you place a bet and the market moves against you it can be agonising to watch your losses accumulating. Psychologically, you hope for a recovery and cling on, but the spread worsens. Finally - the bet expires and BOOM! You've lost a high multiple of your stake.

A key survival tactic in spread betting, as in share trading, is knowing when to bail out and cut your losses. You don't have to wait until the end of a bet - and take the full impact of the disaster. You can cut your losses by placing a buy bet to neutralise a previous sell bet, or by placing a sell bet to neutralise a previous buy bet.

Imagine that on 1st January an indexation company is offering a spread of 6150 - 6200 on the FTSE 100 index on a three month contract (i.e. the bet will expire on 31st March).

You think the market is going to fall so you make a sell bet at £10 per point. But after two months the market has risen and looks like it will continue to rise in the near future.

To cut your losses, you find out the spread being quoted on 1st March for FTSE on a one month contract (i.e. expiring 31st March), and then place a buy bet.

So if the spread on 1st March was 6300 - 6350, you would buy at 6350.

Your loss would then be:

That sounds bad, but if you hadn't closed out, and if the spread at 31st March was 6400 - 6450, you would have been down 300 points (450 - 150) and looking at a £3,000 loss.

Many active traders systemise this "loss-cutting" tactic by placing stop loss orders with their indexation company. These are explained on the next page.

1. What is spread betting? 2. A brief history 3. Spreads on individual equities 4. Spreads on an index 5. Performance spreads 6. Other financial spreads 7. Practical advantages - leverage 8. Practical advantages - going short 9. Practical advantages - hedging 10. Practical advantages - volatile markets 11. Practical advantages - tax 12. Dynamics - think short term 13. Dynamics - the size of the spread 14. Dynamics - upside and downside 15. Dynamics - length of bet 16. Strategy - bet only what you can afford 17. Strategy - cutting losses 18. Strategy - stop losses and limited risk bets 19. Strategy - taking profits 20. Strategy - arbitrage 21. Opening an account 22. Placing a bet and managing your account 23. Regulation 24. Some more tips 25. Conclusion

• The Investors Guide to Financial Spread Betting