If we look at a typical scenario Spread Trade we can understand the risk as being simple.

- I Buy Anglo American at R2 a share ( We refer to each share as a point in spread trading).

- The Share Price drops rapidly by 20 points.

- My Trade on Anglo American is R2 x20 points down at -R40.

Now imagine you took a large risk on a trade and you end up losing more money than you put down! Spread Trading involves initially depositing only a small percentage of the total trade value, and so losses could quickly exceed your initial deposit requiring you to make further payments.

(That said, most spread trading accounts will ensure you set a stop loss level at a safe distance from your opening level on the trade. Therefore when the market turns against you the account automatically gets you out of trouble before any significant damage is done. This ensure you stay away from your initial deposit.)

Anglo American and other popular shares are highly liquid. It can move within a 100 point range quite easily in a day. So if you don't look at your risk to reward ratio properly and you don't take into account the huge volatility in such a share on a daily basis you could be in for a torrid time.

The real risk inherent in this form of trading is the inability to maintain a cool and calculated approach to your trading.

Panic, poor decision making and recklessness can lead to massive losses.

Remember, only spread trade what you can afford to lose.

Another tip - if you NEED to make money spread trading, you simply won't!