Calculating your Position Sizing

By mosesbet · Filed Under Spread Betting Comments Off on Calculating your Position Sizing 

How to Calculate your Position Sizing

Spread betting is becoming rapidly popular among experienced city traders and beginners, however one of the biggest risks of this industry is losing far more in your opening trades than you can handle.

In order to prevent this from happening, you’ll need to learn how to control your position sizing and how much of your funds you risk in each transaction.

How Much Should You Risk in Each Trade?

Normally the amount of funds that you should risk in each trade shouldn’t be more than 1% of your total account balance.  For example, as I mentioned in a previous article about moving averages you should only be risking a total of 1% of your funds using this strategy.

If you’re a newer spread bettor than you’ll obviously want to limit your exposure by only risking maybe 0.5% or even 0.25% of your total funds on an individual trade.  Remember that in order to reduce your potential losses and keep your risks low you should ideally be signed up to a spread betting firm which allows you to bet with a smaller minimum stake.  For example, FinSpreads offers a Training Program for Beginners which allows you to open positions from just 10p per point where as the minimum at Capital Spreads and Tradefair is £1.  This would mean you’d need a higher deposit amount and higher risks when trading on individual stocks.

Calculating your Stake Size

Bearing in mind you only want to risk a maximum of 1% of your total funds in each trade you can use this information to find what stake amount you should be betting at any one time.

Lets say that you open a new trade and amend the stop-loss in your account to be 10 (i.e. if you buy stock at 115p than the stop-loss will be 105p an d your trade will close if the price drops this far).

You don’t need to worry too much about this since most spread betting firms will offer automatic stop-losses in all of the trades you open anyway.  However just for this example lets say your stop loss is 10 points.

If your total funds in spread betting are worth £5,000 than the 1% rule above means you only want to risk a maximum of £50 per trade.

Using a 10 point stop-loss, we can then calculate that 50/10 = £5.  This means that with a you should only be risking a total of £5 per pip when you open a new trade.  The maximum amount that you can lose based on your stop-loss position is £50 which equals 1% of your total online funds.

Conclusion on your Stake Size

Obviously the amount that you can afford to stake in spread betting depends on the size of the spread offered by the broker plus the size of your stop loss. If you’re a complete beginner to spread betting than you’re better off even signing up to a demo account and spread betting for free with virtual cash or choosing a broker with offers minimum stake sizes of 50p or less.

 

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