One of the amazing things about spread betting is that you really can make some serious profits. However, far too many people try spread betting and end up losing money and then quitting.

The dominant reason for this is that they don't manage risk.

A good friend of mine was a big spread trader about 4 years ago with a starting trading fund of £10,000. When he made money all was well but he didn't manage risk and when a couple of large trades went against him he paid a hefty price. His account went into the red by almost £8,000 and the account was frozen. The bookies threatened to take him to court unless he paid up promptly.

I'm not trying to scare you but this is a real-life example of where things can go badly wrong.

So what can you do to prevent this?

One of the easiest ways to avoid this happening to you is to place a stop-loss whenever you trade. This means that the trade is closed out if the price moves against you.

Another easy way to minimise losses to to limit your stop-loss to a set percentage of your trading fund. This means that if the trade goes wrong you will only lose a small amount of your fund.

Now if you put these two tools together you can really begin to take control of potential losses.

For example:

If you have a trading fund of £5,000 and decide to only risk 1% of your fund on any trade, you would lose no more than £50 if a trade goes against you.

So here's what to do:

Imagine that the FTSE 100 is trading at exactly 5000. Your analysis indicates that it's likely to go up. So you enter the trade with a buy order at 5000 at £1 per point.
Based on 1% of your fund you set a stop-loss to close the trade if the FTSE falls to 4950, meaning that you would only lose £50 if the FTSE falls.

If you take this past week as an example, the sudden upswing of the FTSE 100 will, no doubt, have stung many traders and also put a few traders out of the game. By using a stop-loss system I've only lost a few percent of my trading fund.

Hopefully you can see how it would take you a long time to lose all of your money with careful risk management and effective use of stop-loss.