Trading on the stock exchange is a risky business and spreadbetting is seen as even riskier.  However, managing this risk and your perception of this risk is the key to successful trading.  This can all be found in this spread betting guide.

The one thing that people fear most about trading the stock market is losing all their money.  One piece of advice that is rarely headed is ‘Never trade with money you can’t afford to lose’.  This is sound advice.  Many people borrowed money during the Dot.com bubble only to see it all wiped out in the dot.com burst. 

So how do we manage the risk and our perception of it?  Our perception of money is different from person to person.  Someone who earns £1 million a year will not think much of losing £1000 but for the person who earns £15,000 a year, losing £1000 could be seen to break the bank. 

The way to change our perception is to think of money as a tool to make more money.  We must detach our emotions from money.  Think about trading with £500, would you be comfortable with that or would you lose sleep at night?  If you’d lose sleep at night then there is too much emotion attached to that amount.  Try using a smaller amount, for example £100.  Would you be comfortable trading with £100?  If this is better then this is your comfort level.  Trade with this amount until you are happier to trade with more. 

Becoming comfortable trading with more money comes from experience.  If you find that you’re profiting from trades more than you are losing then you will build confidence in your ability to read the market.  Don’t become overconfident.  As soon as you become overconfident the market will bite you.  Keep your trades small and gradually build up to higher value trades.

So now that we’ve dealt with your perception of risk, we now need to make sure that you don’t lose all your money.  This is done by making sure that you always, I’ll repeat that, always put a stop loss on a trade.

A stop loss is an order to sell (or buy if you are shorting the share) the trade you made if it reaches a certain level.  For example, if you bought British Telecom (BT.A) at 102.3p and it subsequently dropped rather then rose, your stop loss level is the point at which you decide that you won’t take any further losses.  So in this case I might put my stop loss at 10% less than my buy price.  This means that the shares would automatically be sold at 92p.  I’d take a loss but I wouldn’t lose all my money.

Stop losses should never be moved down.  Once you have set your limit to what you would be willing to lose, you should never move it down.  However, you can move your stop losses up as the price rises.  I like to keep my stop losses at 3% below the price but tighter stop losses (eg 1%) would be suitable in less volatile markets.

Think about your trading as a business.  In business you would have sales which would give you profits (winning trades) but you’d also have business expenses.  Think of your losses as business expenses.  By placing a stop loss on all your trades, you ensure that your expenses don’t go too high and wipe out your profits.

As you can see, there are ways to manage the risk in trading the stock markets.  You can also trade from as little as 50p if you are using spread betting but you must ensure that you place your stop losses and vitally important, don’t move them down!

Ensuring you know what you're doing is essential to profit from the markets.  Going into trading these instruments without a spread betting guide would be as risky as climbing Mount Everest with no knowledge of climbing.  Make sure you don't make that mistake.