If we recap what we’ve already learned – choosing to go short allows a trader to benefit from the market should they believe its price will drop.
Let’s imagine we’re looking at some Apple shares:
A Successful Trade On Apple – Going Short
Currently, apple is trading at 11230 : 11234
You think that the market price of its shares are likely to fall and therefore you decide to bet at 11230 on “sell” for £5 a point. That means for each point that the market goes down, you gain £5.
After a week, you are proved correct in your prediction. The price of Apple’s shares drop to 11218 : 11220. You decide that you are going to close the position at 11220, choosing to buy.
As your spread bet was £5 for each point, you have made a profit of £5×10=£50.
However, it is vital to point out that traders need to know about the various risks of going short. The main problem is that the amount that the price of the market can rise to is limitless, and therefore if you fail to place stops appropriately, you could face enormous losses.
To demonstrate this, let’s take a look at a Microsoft trade scenario that didn’t go so well.
An Unsuccessful Trade On Microsoft – Going Long
Imagine that Microsoft currently has a spread of 5202 : 5198.
You make the decision that you are going to buy at 5202 for £10 a point. However, a couple of days later you hear the news that a serious flaw in one of their operating systems’ security has occurred. Suddenly, Microsoft share prices tumble and the spread moves to 5188 : 5185.
Immediately, you choose to close your position to try to cut your losses.
Since your bet was £10 a point, you made a loss of 10×10=-£800.
Therefore, you made a loss of £800.
Losing a trade is bad enough, however what’s worse is the fact you had just £500 in your account and not just lost that amount, but you also now owe your provider £300 more that you never had to start with. You will probably soon receive a margin call from your provider telling you that you have to add more funds to your account or they’ll be closing you out. No traders wants to ever receive such a call.
However, this example was completely preventable. The good news is that there are ways that you can protect yourself from risks like this. Our section entitled “Controlling Your Risk” on our Spread betting brokers website helps you to learn more about this.
No trader can get every trade right and risks are inevitable in trading the markets. You need to accept that some trades will lose and some will win, however by being diligent and carrying out research, you will be reducing the chance of losing a trade.
It makes sense to start out by practising with a free demonstration account which will enable you to get a greater understanding of the concept of spread betting. These kinds of accounts can simulate the trading experience, enabling you to create a securities portfolio then learn about how you can manage risks without spending any of your own money. Most of the best providers offer these free accounts, so try one out before you decide to invest in a proper trade to get a sense of how the platform works and how to best trade the markets.
Also in our ultimate guide to spread betting, it covers:
- Ten Good Reasons To Try Spread Betting
- The Potential Risks
- Making A First Trade
- Positive Thinking – Going Long
- 5 Ways To Make A Profit From The Market
- Spread Betting’s Hidden Costs
- Choosing The Right Provider Of Spread Betting Services
- Glossary Of Spread Betting Terms
- Compare spread betting brokers, features, accounts and markets
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