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'Cut your losses and let your profits run'

This adage is used by market professionals whether trading spread bets, futures, options and even these days stocks.

A stop loss or a similar disciplined action is of the utmost importance when dealing with products that use margin such as spread bets. Losses cannot get out of control when you buy a stock in the cash market because you always know your maximum loss, the stock cannot fall below zero. However because spread bets use gearing a very sharp move against your position can do you and your account untold damage.

Stop losses are not just useful for controlling risk, they have a hidden and very subtle use as well. By using a stop loss a spread bet trader can determine exactly what size of bet to take alongside the amount of money or risk to assign to any spread bet. This is explained in greater detail on Page 8.

Why is limiting your losses so important?

• Limiting your losses can make you money by default
• Most people believe that the best traders are always the ones who buy and sell at the better prices
• For example where you buy a stock at £5.00 and sell it at £5.50, a 'better' trader buys the stock at £4.50 and sells it at £6.00
• But the reason why some traders get far better results than others is often a lot simpler

There Were Two Traders

• Spread Trader A and Spread Trader B meet up at the end of the year to discuss their trading
• Trader A reports that he made £10k for the year while Trader B reports a profit of £5k
• Both want to improve their trading and decide to go to a Spread Bet trading coach
• The coach tells them to make two separate piles of their past year's spread bets, with all their winning trades (whether £1 or £500) in one pile, and all their losing bets in the other

What Trading Coach sees is this:

• Coach tells Trader A that he is very effective at making money and very 'effective' at not losing too much. The coach wishes him luck for the following year
• But, Coach has a very important observation for Spread Trader B:
• Coach shows B that he is just as effective at making money at his pal A: he is as good as A at picking good trades and making good profits
• Where Trader B falls down is on the losses. Coach tells B that he is nowhere near as effective at handling or managing his losses as A. What is more, if he can reduce his losses just 25% then his overall winnings would rocket by 50%

You can see from this that making more money using spread bets is not just about picking more winners. You must ensure you lose less and stop losses is one of the tools to enable this. A profitable trader is normally the one that concentrates far more on managing losses rather than consistently looking for winners.