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LS Trader Financial Spread Betting Update

This coming week is a shortened trading week as Saturday the 4^th is Independence Day in the US. Therefore some US markets will be closed on Friday. This week also brings with it the end of the second quarter so on a seasonal basis we are entering in to a weak time of the year for stocks. July is the start of the weakest 4 months of the year for the Nasdaq on a seasonal basis. We can also see an increase in volatility in the stock markets as liquidity decreases over the summer months.

Stocks

The S&P 500 ended the week marginally lower and the long term trend remains down. Earlier in the week the S&P fell through support at 900 and posted a low for the week at 884 before recovering to the close on Friday at 913. A Range is forming between 875 and 950 which has held since the 1^st May. A break of either level could prove significant and lead to a large move in the direction of the breakout.

As with the S&P500, the Nasdaq 100 dropped mid week but recovered by Friday to end the week ahead and we saw similar patterns in the rest of the stock indices.

Commodities

The commodity markets had a volatile week which saw a sell off early in the week for many markets before an eventual recovery. Gold rallied to close at its highest level in 2 weeks and the other metal markets followed a similar pattern after weakness early in the week.

August Crude briefly cleared the $70 level but fell back to close below the key $70 level. Lean Hogs, which has been in a downtrend for nearly all of 2009 so far, once again posted new contract lows.

Currencies

The US dollar index ended the week lower for the second straight week and the trend remains down for the dollar. The dollar was higher earlier in the week but was unable to hold on to those gains. The Japanese Yen was higher again and may now be headed for a test of resistance at 106. The British pound and the Euro also gained against the dollar.

The Swiss franc ended a volatile week slightly lower after suspected intervention from the Swiss National Bank had led to large swings in the currency which included a huge sell off on Wednesday of over 300 pips.

Interest rate futures

Interest rate futures rallied and were all higher for the week. Long term interest rate futures closed at their highest levels for a month.

Good trading

Phil Seaton

PS. Click here to learn more about the LS Trader financial spread betting system.

LS Trader Financial Spread Betting Update

Several recent trends came to an end during the past week as the markets on the whole sold off and even markets that are still in valid trends saw moves against the trend. This does not mean that the trends in the markets have changed as yet but only means that the markets have moved against the current trends. It remains to be seen over the weeks ahead whether these moves are corrections or genuine reversals in trends.

During the past week we exited six trades, five of them for comparative small losses and one winner. We also rolled over six trades in to the next contract of which five were profitable. Of the five profitable trades three were very profitable with large profits being banked from Lean Hogs, Soybeans and Soybean Meal. From the closed trades and rollovers we banked a total of 7001 financial spread betting points for the week with the majority of them coming from the three trades mentioned above.

Stocks

The S&P 500 was once again unable to stay above the 200 day moving average and ended the week lower. The September contract tested support at 900 and moved higher from there to close the week out at 915. The Nasdaq 100 also lost ground for the week.

The Nikkei was unable to stay above the 10000 level and pulled back for the week. The Hang Seng and the German Dax were also lower. The long term trend remains down.

Commodities

Commodities for the most part had a poor week with many markets selling off quite heavily. The grains and soft markets were lower for the week again. The soybeans markets, which have recently been in a very bullish uptrend sold off quite heavily on Friday. We have benefitted from the recent upmoves in the Soybeans markets and banked substantial profits from both Soybeans and Soybean Meal when these 2 markets rolled over on Friday.

The metals were lower again as these markets take a pause from the recent upmoves. The energy markets were lower for the week. July Crude fell just short of new contract highs when it reached $72.75 on Tuesday but then fall back sharply to the close on Friday. July Heating Oil and No leaded gas were also sharply lower and Natural Gas ended the week flat.

Currencies

The US dollar index ended the week slightly lower and the trend remains down for the dollar. The dollar was ahead until the middle of the week against many of the major currencies but this changed by Friday’s close with most currencies regaining the losses that had been seen early in the week.

The big gainer for the week was the Japanese Yen, which gained against the British pound and the US dollar. As we have mentioned here before, the Japanese Yen tends to move in the opposite direction to the stock markets. The Japanese Yen has been consolidating against the US dollar for a few months now and is due to break out from the range. When it does we may see a fairly substantial move in the direction of the breakout.

Interest rate futures

Interest rate futures ended the week marginally higher but had been higher mid week. Volatility in the interest rate futures markets continues to rise steadily higher but the trend remains down.

Good trading

Phil Seaton

PS. Click here to learn more about the LS Trader financial spread betting system.

LS Trader Financial Spread Betting Update

The past week has been another good week for the LS Trader system although account volatility was fairly high due the number of trades that we currently have open. The LS Trader model account gained 4.48% for the week for the fourth straight week of equity gains.  

During the past week we exited 2 trades and rolled over the contracts on 5 trades to bank a net gain of 655 financial spread betting points. As of Friday’s close, 20 of our 23 trades are in profit with 3 trades showing small losses.  This week we are again entering 2 new trades to take our total number of open trades up to 25.

Stocks

The stock markets ended the week slightly ahead. The S&P hit new contract highs on Thursday and closed slightly ahead for the week at 944. As with last week this market has closed right on the 200 day moving average. The volatility of this market has dropped so we may be building up for a fairly large move in either direction soon.

The Nasdaq 100 posted a new contract high on Wednesday before ending the week lower. The Hang Seng had another good week and followed through to complete a long term trend change from down to up. The Nikkei also continued to gain and was able to clear the 10000 level for the first time since early October last year.

This Friday is triple witching so we may see an increase in volatility.

Commodities

Commodities again had a mixed week again on the back of a volatile week for the US dollar. Gold was sharply lower on a week of increased volatility. Copper ended the week ahead having posted new contract highs mid-week. The other metals all declined. The grains and soft markets were generally lower for the week.

The energy markets were ahead for the week again with Crude oil taking out the $70 level and again posting new contract highs. The July contract closed the week at $72.04 and may now be heading for a test of $75. No leaded gas was and Heating oil both made new contract highs during the week and no leaded gas closed over the $2 level for the first time since October last year.

Currencies

The US dollar ended the week lower but volatility increased in this market for the second straight week. The long term trend for the dollar remains down.

The British pound was sharply higher for the week against the dollar but just failed to post new contract highs. The pound rallied for 4 straight days before a decline on Friday. The long term trend is still down for the pound/dollar but this may change soon. The pound also rose for the week against the Yen and posted new contract highs in the process.

The higher risk commodity based currencies were mostly ahead for the week with the Canadian dollar ending the week flat. 

Interest rate futures

Interest rate futures ended the week higher but had earlier posted new contract lows.  Interest rate futures had a fairly strong rally on Thursday and Friday but the trend remains down.

 

Good trading

 

Phil Seaton

 

PS. Click here to learn more about the LS Trader financial spread betting system.

 

LS Trader Financial Spread Betting Update

The past week has been another excellent week for the LS Trader financial spread betting system although volatility across several markets was much higher this week. The LS Trader model account gained 6.8% for the week for the third straight week of equity gains.

As of Friday’s close, 18 of our 23 trades are in profit with 5 trades showing small losses. This week we are entering 2 new trades.

Stocks

The stock markets ended the week slightly ahead. The S&P crossed the 937 level that we mentioned last week and also crossed the 200 day moving average but was unable to stay above the moving average and closed at 940. The stock markets could go either way this week as the S&P is right on the 200 day moving average and we may see a reaction in either direction.

The Nasdaq 100 had a good week and briefly cleared the 1500 level on Friday but was unable to stay above it before closing at 1495. The Hang Seng continues to perform well and may be on the verge of a long term trend change soon and the Nikkei also gained for the week.

Commodities

Commodities had a mixed week after a volatile week for the US dollar. Commodities are generally sold in US dollars so movements in the dollar affect commodity prices.

The metals were mixed for the week as Gold rallied to $987 on Tuesday but then sold off sharply for the rest of the week before closing at $962. Silver followed Gold’s lead hitting new contract highs early in the week but then falling away to the close on Friday. Copper, Platinum and Palladium all gained for the week.

The energy markets were ahead for the week with the exception of Natural Gas. Crude oil fell just short of $70, posting new contract highs (July contract) at $69.25 before closing at $68.44. The $70 level may be key this week. No leaded gas was and Heating oil both made new contract highs during the week.

Currencies

The US dollar ended the week ahead after a very mixed week. The Dollar index June contract posted new contract lows on Tuesday at 7837 but then rallied to close the week at 8073. The past week has seen quite a respectable counter trend rally from the US dollar. It remains to be seen if this rally can continue against the trend this coming week.

The British pound ended the week lower for the first time in a few weeks after 3 days of heavy selling. The higher risk commodity based currencies all lost ground for the week having at one point in the week hit new contract highs again.

Interest rate futures

Interest rate futures were sharply lower across the board as the 5 year note convincingly took out key support levels. Short term interest rate futures have been the most resilient to the recent sell off but this week the 3 month Eurodollar sold off heavily hitting its lowest level in a month. The 5 year, 10 year and 30 year futures all hit new contract lows this week and all continue to trend nicely lower.

Good trading

Phil Seaton

PS. Click here to learn more about the LS Trader financial spread betting system.

The markets are really trending very well now and at the time of writing we are seeing some excellent performance from the LS Trader system, which is currently up 30.3% for 2009 to date. This figure is just shy of the equity highs that we set back in early March this year. Currently we are in 23 trades and all 23 trades are in profit.

Although this is behind our normal average returns of around 150% per year (we are now nearly half way through the year) it’s very encouraging as the start of this year has been very tough for trend following systems. Volatility has been very high in many markets for quite a while but over the past few weeks we have seen a reduction in volatility almost across the board and this has helped with generating profits on trades.

When a market is highly volatile it is necessary to use a wider stop than you would normally like to ensure that you do not get shaken out of the trade. If you are using a fixed percentage of equity per trade as we do at LS Trader then by using a wider stop you have to be using a smaller bet size per point.

Using a smaller bet size per point obviously means that you make less profit when the market moves in your favour and requires a larger move in a market to achieve the same profit as you would with a standard size position. One of the great advantages of financial spread betting is of course that you can place small bet sizes per point and are not restricted to buying full futures contracts.

Over the past couple of weeks we have seen a drop in volatility which has enabled us to use a slightly tighter stop and subsequently larger bet size per point. Therefore when the markets have gone our way as they have over the past couple of weeks we have been able to achieve some excellent rapid profits.

Currently the market conditions are optimal for trend following approaches and due to the length of the recent consolidation phase that we have seen in many markets, these good trending markets may continue for a while yet.

Yours for bigger winners, more often

Phil Seaton

PS. Click here for a 60 day trial to the LS Trader system

Here is the seventh and final part of our 7 part series titled "The 7 Deadly Financial Spread Betting Mistakes". Today we will discuss the seventh financial spread betting mistake that financial traders make:

Mistake #7 Listening to the news and fundamental analysis

Essentially there are two main trading styles, one is fundamental trading and the other is technical trading. Unless you are a full time trader and can devote your life to studying the markets constantly, fundamental analysis is not the way to go. Unless you are George Soros who has a lifetime of experience behind him and an excellent understanding of fundamentals you will almost certainly be a losing trader by trading fundamentals.

Even full time traders and fund managers who devote their lives to analysing the fundamental aspects of the markets and hire a large staff to do research for them still get it wrong most of the time. That’s one of the reasons why most fund returns are so poor.

The reason why fundamental analysis is so ineffective and very few traders can make money from this approach is that there are so many variables. For example, when you hear a particular news item or hear very good results from a certain company, many times the price will go down. This is puzzling to most people but the reason is that the markets are always looking ahead and have already discounted the news in most cases.

Another problem with fundamental analysis is that it is also difficult to know what reports or news items are actually true, and even if you know what is true how can you be sure that your interpretation of the news is correct? What about timing? Even if you have good reliable knowledge and a true interpretation of the news, how do you know when to act on it?

Perhaps the most damaging aspect of fundamental analysis is that it does not afford any risk control. If you think a certain market is going to go up but instead it starts to go down, as the price moves further away from your idea, or the point at which you though it was a buy, it must be an even better buy. The market then drops further and looks like a better buy still and so it goes on. Before you know it you have a very large losing position on your hands.

Essentially, if you use the fundamental trading style and are convinced of your research, the more a trade goes against you the better it looks so you end up buying more and getting into real trouble.

You hear about cases like this all the time, and often hear comments from fund managers like “We were convinced of our analysis and that the market was a buy. We bought it all the way down”.  If you had been trading correctly, you would just get out of the trade whilst your loss was small. If you are holding a losing trade after 2-3 weeks you are clearly wrong and should be looking to exit the trade.

I have found in my own trading that even if you are not trading on fundamentals but are using a technical trading approach you can be negatively influenced by the news without wanting to be. For this reason I believe that many people are better off avoiding the news altogether.

For example, let’s say that your trading system has generated a buy signal on a particular market but you have heard a rumour or news item that may affect the market you want to buy, you decide it is prudent to hold off from taking the signal and wait. It turns out that the market ended up going up exactly as your system had indicated, but you missed the move through doubting your system.

Now you are reluctant to take the trade as it has moved from where you wanted to buy it and decide to wait until the market comes back to the price that you were originally going to buy at. The market never comes back to that level and becomes one of the great trades of the year. You missed it all because of some news item. Had you not followed the news you would not have overruled your trading system and would now be sitting on a profitable trade.

Of course this could work the other way around and keep you from taking a losing trade. The fact is that it is important to have a trading system and to follow it consistently, regardless of what items you hear in the news or read in the papers. Your profits at the end of the year will come from following your system consistently throughout the year and not from listening to news items.

There is however a positive use for the news which can be useful some of the time and that is using news as a contra indicator. For example, if good news comes out on a particular market and that market goes down then you may want to think about liquidating a long trade or if you are out of a market possibly going short.

Another use for news items is magazine front covers. These are often excellent contra indicators and can be very useful for picking market turning points and can be used to fade (go opposite) to the news. For example, say that we get a headline on a major magazine that runs something like “Cheap oil forever”, that’s likely to be a sign that the oil markets are either at the bottom or near the bottom of the market.

How can this be? Essentially there are 3 types of market participants:

1. The investor. Always in early and happy to wait for returns on their investments
2. The trader. Never in or out first but catches the meat of the move in the middle
3. The public. Nearly always wrong and last in on major moves and also last out.

The cycle tends to go from investor buying at the lows but selling a bit before the top to the public. The public gets in usually at or near the top of the market. Because the investor and the trader are already in the market, the public has nobody to sell to and so as there are no more buyers, the price falls.

When a market reaches the stage of hitting the front covers we are usually at the stage where all of the public are in the market already, so this is a good indicator that the market may be due to reverse. To continue our cycle, the trader usually gives back some profits and sells on the way down. The trader when convinced the market is now in a downtrend sells the market short and profits from the down move.

The public hold on right to the bottom and when they can’t stand it anymore they then sell back at the bottom to the investor and so the cycle begins again. This is another reason why such a high percentage of people lose money (especially the public) in the stock markets. The solution is to identify and follow trends.

A good trading system such as the LS Trader financial spread betting system will automatically get you in to the market when the conditions are optimal. It will also get you out of the market if things are not going for you with a minimal loss. You do not need to know the reasons why a market is moving up (or down) only that it is and then jump on board. This is the way to make consistent profits trading the financial markets.

I hope you have enjoyed reading this 7 part series that I call “The 7 deadly financial spread betting mistakes”.

Good luck in your trading

Phil Seaton  

PS. If you are not already subscribed to The LS Trader system please click here to start your 60 day trial. The system has been built around all the points covered in this article and avoids all the mistakes that most users of financial spread betting make. The system comes with a full 60 day money back guarantee.

Here is the sixth part of our 7 part series titled "The 7 Deadly Financial Spread Betting Mistakes". Today we will discuss the sixth of the 7 financial spread betting mistakes that financial traders make:

Mistake #6 Day trading - what all day traders should know

A large percentage of people who trade online or use financial spread betting are short term or day traders. With few exceptions these traders lose money. The reasons for this are simple enough but go against the grain of what most people believe or want to believe. This is therefore a controversial post, but it reflects my experience of what works and what does not work in online trading and financial spread betting.

Day Trading has been made popular by brokers and trading firms as each time a trade is placed these firms earn a commission. Earning commissions for these firms is the name of the game. In financial spread betting you are charged a spread (commission) each time that you open or close a trade. It is therefore obvious that these firms want to encourage you to trade frequently, as this is how they make their money.

All of these commissions or spreads reduce the profitability of a trader or trading system. Systems or traders which trade frequently generate very high commissions, making it that much harder to make a profit.

What is needed is a system that trades frequently enough to make good profits without generating too many commissions by constantly going in and out of the markets. The irony is that the shorter the time frame you use as your trading indicators i.e. whatever indicator you use to give you your buy/sell entry signals, the weaker the signal is. So, day trading systems use the weakest trading signals and at the same time generate the highest transaction costs.

Day Trading therefore is a low performing style of trading as the signals are weak, but a high transaction cost generating style, the net result of which makes money for the brokers and spread trading firms but leaves the traders with empty pockets and diminished bank accounts.

The alternative is a trading style that uses stronger signals (medium to long term) and therefore trades less frequently, generating lower transaction costs. Now you have a system that generates greater profits and has lower costs which equates to a profitable trading system. This style of system is good for the trader but not so good for the broker.

It is little wonder then that everywhere you look, short term or day trading systems are promoted, but you rarely hear about medium to longer term systems. Another reason for this is the software vendors and people who want to sell you real time data. To trade profitably you only need end of day data. There are numerous sources on the internet where free end of day charts and prices are available.

You do not need real time data and it is in fact a very bad idea as it leads you to trade too frequently.  Ed Seykota, the legendary trend follower once said that having a real time quote machine is akin to having a slot machine on your desk in that you end up feeding it all day long.

The problem with real time data and day trading apart from what has been discussed already is that you are too close to the market. You are in fact so close that you can’t see what’s really happening. Imagine holding a chart in front of you and pulling right up to the end of your nose. You can’t really see what’s going on, but as soon as you move the chart away to about arms length everything becomes clear. You can now see the trend and direction of the market.

Consider the following and see which conveys more about the state or direction of the market

1.      1 minute bar chart

2.      5 minute bar chart

3.      30 minute bar chart

4.      Hourly bar chart

5.      Daily bar chart

6.      10 day bar chart

7.      50 day bar chart

 

It should be obvious that the information contained in a 1 minute chart is less relevant to the state of the market than a 50 day bar chart. If a market hits a 30 minute high this is clearly less significant than a 50 day high. If a market hits a 50 day high then clearly something is going on in that market which is causing it to rise.

It can be seen from the above that the shorter the time frame (within reason) the weaker the information and the longer the time frame (within reason) the stronger the information. What is therefore needed is an intermediate indicator because as we have seen a short term signal is virtually worthless and no better than random, whilst an extremely long term indicator would severely limit your trading options.

There are numerous indicators that can be used, whether we are using highs and lows over a certain number of days, or moving averages. The same holds true with moving averages as with highs and lows over a period of days. A 5 day moving average indicator is clearly a weaker indicator than a 200 day moving average.

We must also consider that if you are day trading, the maximum amount of profit that you can make on a trade is how far the market can move in a day (most day traders are reluctant to leave trades open overnight and close them before the end of the trading day). Whereas if you are using a medium to long term system you could be in a single trade for weeks or even months, meaning that the potential profits from a trade are many times what can be made in a single trading day.

The LS Trader system, which is a medium term trend following system is often regularly in trades for months. In fact, in 2008 the average duration of a winning trade was just over 80 days. Consider for a moment how much profit each trade is likely to generate if it is open for an average of 80 days whilst at the same time how little spread is paid. The spread is paid upon opening and closing of the trade and a reduced spread paid for rolling the contract over, which in many instances is quarterly.

Compare this to day trading where spread is paid each time a trade is opened and closed throughout the day. It should be self evident that a day trading system has to perform well just to cover the transaction costs. In my experience day trading systems rarely generate enough profit to pay for the transaction costs, let alone leave enough after costs to show a profit at the end of the year.

In addition to the facts that day trading systems are low profit and high transaction cost generating must be added the fact that if you are day trading you have to sit in front of the screen for 8 hours a day. This is extremely time consuming and also highly stressful. This is not the way to trade, either from a profitability angle or a lifestyle angle.

The LS Trader system is a medium to long term trading system that only trades on a weekly basis. Trades are opened on Mondays with stop losses set. Traders can then go away and do whatever they want and not need to do anything on their account until the following week. This leads to low commission generation and high profits.

Next we will discuss Deadly Financial Spread Betting Mistake # 7 “Listening to the news and fundamental analysis”

Until next time, good luck in your trading

Phil Seaton

www.PhilSeaton.co.uk

PS. You can sign up for the LS Trader financial spread betting system here. The system comes with a full 60 day money back guarantee.

Here is the fifth part of our 7 part series titled "The 7 Deadly Financial Spread Betting Mistakes". Today we will discuss the fifth of the 7 financial spread betting mistakes that financial traders make:

Mistake #5 Taking too much risk

Most online traders take too much risk when trading. This is especially the case for people trading online with financial spread betting.

In futures trading, traders decide how many contracts to buy of each instrument, but in financial spread betting, traders only have to decide how much to bet per point. This makes it much easier to over trade and to risk too much on each trade.

It is also much easier now to trade too frequently, with the temptation to sit in front of the screen all day. It is no longer necessary to pick up the phone to execute your trades as you can access your financial spread betting account 24 hours a day and can trade with ease at the press of a button. This can very easily lead to over trading and taking too much risk.

To get around this it is necessary to have a specific system to follow with specific rules which will govern each of the following:

1.      The markets (instruments) in your portfolio. 

The selection of markets (instruments) in your portfolio is a crucial factor. It is important to select actively traded markets so that you can exit your trade when you want to. If liquidity in a certain market is low this can prove difficult and expensive as you may get a far worse price than you had expected when you go to exit your trade. 

2.      How many markets in your portfolio you will trade at any given time 

The number of trades that you will have open at any one time determines the total amount of risk that you have. There must be a point at which you do not open any new trades until some prior trades have been exited, or the stop loss in some trades has moved up to the entry level. 

3.      How much exposure you will have on open trades at any one time 

This follows on from point 2. If you are going to risk 2% per trade then 50 trades open at one time would mean that 100% of your account is exposed. This would be an extremely dangerous game to play and the volatility in your account would be extremely high.  

If you are only prepared to risk 50% of your account then you can only have 25 trades open at any one time. Obviously as certain trades progress you can move your stops up to break even and then eventually to lock in profit. At this point you could have more trades open but not so much risk exposure. 

4.      Your bet size for each individual instrument. 

Most people who use financial spread betting bet far too much per point. The correct approach is to decide where you will set your initial stops, assign an amount of risk per trade which should be the same for all trades and then subtract your exit price from your entry price. You would then divide the number of points that your stop is away from the entry price by your risk per trade which would give you your bet size per point. 

5.      The distance your initial stop loss is from your entry price 

Most online traders put their initial stops too close to the market and bet too much per point. The correct approach is to use a wider stop and a smaller bet size. Stops which are too close to the market invariably get hit, causing you to get taken out of a trade prematurely. At the same time you don’t want your stops too far away as this will cause you to trade with a reduced size which will limit your potential profit. 

6.      How you will manage your trade once it is open and when you will exit the trade. 

You must have a set point at which you will exit your trade. A good trading system will have specific rules for this and your stop should follow up behind the current price as the trade progresses. Initially moving stops up behind a trade as the trend progresses will enable you to limit your exposure on that particular market and ultimately to lock in profit whilst still allowing the trade to progress.

7.      The correlation between each instrument. 

Many markets are correlated. Some are highly correlated such as Crude Oil and No Lead Gasoline; others are slightly less correlated, like Soybeans and Wheat. Others have little or no real correlation at all. 

If you trade too many markets that are highly correlated you are trading the equivalent of one trade but with much more risk as you have multiple trades. A dramatic move in these markets is likely to cause a severe drop in equity in your account. 

8.      The maximum drawdown in equity that the system will generate 

A drawdown in equity is the distance of the highest point of equity to the lowest point. A good trading system will have a high profit return with the smallest possible drawdowns.

The maximum drawdown that the system has should be within the comfort zone of the trader. Some traders are able to withstand high volatility in their account and larger drawdowns and are subsequently able to capitalize on market moves. Other traders are more risk averse and have to reduce either the number of instruments that they trade or the risk per trade (bet size). 

9.      The duration of the drawdowns  

The duration of the drawdown is how long it takes in trading days to return to new equity highs from the lowest point. A good trading system will recover in a relatively short period of time. 

10.  The frequency of the drawdowns 

The frequency of drawdowns a system has is also a factor. If you trade a system which has frequent drawdowns in equity of 50%+ you fill find it extremely difficult to follow the system over a long period of time, increasing the likelihood that you will abandon the system. Chopping and changing systems will ensure that consistent profits will elude you. 

The LS Trader system takes all of the above factors into account and is a robust trading system, which has been optimized in all of the above factors, culminating in a system which has high returns whilst also keeping drawdowns to a minimum. There are specific rules to cover all of these areas meaning that the trader will always know exactly what to do in any eventuality.

In the next part which will be published in the next few days we will discuss Deadly Financial Spread Betting Mistake #6 which is titled “Day Trading and what all day traders should know”.

Until then, good luck in your trading.

Phil Seaton  

www.PhilSeaton.co.uk

PS. If you are not already subscribed to the LS Trader system, please click here to start your 60 day trial. The Ls Trader system has been built around all the points covered in this article and avoids all the mistakes that most users of financial spread betting make.

Here is the fourth part of our 7 part series titled "The 7 Deadly Financial Spread Betting Mistakes". Today we will discuss the fourth of the 7 financial spread betting mistakes that financial traders make:

Mistake #4 Averaging down (adding to losing trades)

This is one of the biggest mistakes that financial traders make and it is the downfall of many traders and trading systems. Many traders think it’s a good idea to add to a losing trade as they think that if they take a second position they are averaging down their price. In rare cases this might actually work, but in most cases it will go against you and in fact creates a snowballing effect, whereas now instead of having a single small loss, you now have 2 losses.

Now you can find yourself getting into real trouble by opening a third and a fourth unit. Before long you have a huge position open which is way out of balance for your account and much too risky. These trades often go wrong and when they do they wipe out all of your trading capital. The only real effect of adding to losing trades is an increase in risk.

The right thing to do when a market goes against you is to just get out of the trade when it is clear that you are wrong. A good trading system should have specific rules for defining when to exit a trade if it goes against you. This leads to taking the occasional small loss, but is not emotionally or financially damaging and leaves your trading capital intact for when the market is right and sets you up nicely to take advantage of the next big move in the market.

To be clear, a unit is the position size that you have open. In futures trading this would be the number of contracts that you opened on your original position. In financial spread betting a unit would be the bet size per point that you had opened on your original trade.

For example, let’s say that you are using financial spread betting and that you have opened a trade at £5 per point. Adding a unit would mean that you opened a second position in the same direction (either long or short) for another £5, meaning that you would be either net long (or short) £10 per point. Each additional unit would then be another £5 per point, so you can see how you can quickly build up a large position with a lot of exposure.

Most traders take too much risk in the first place and then compound that mistake by adding more and more trades as the trade goes against them. This is why you hear some horror stories about amateur traders dabbling in the markets and losing their shirts. Adding to losing trades is fatal to your long term profitability as a trader.

Not quite as bad but also very destabilizing to your profitability as a trader is adding to winning traders. Many so called trading gurus will tell you that you should add units to winning trades. I believe that this is also a mistake and is poor advice and here's why…

In my earlier days as a trader I used to add to trades that went in my favour. This is all well and good when things are going well, but what I found would happen was that I would pyramid up my position and get up to about 4 units on a trade, only for the market to reverse and cause me to take a large loss. This can be very frustrating, especially as oftentimes if you had just left your single trade on and had not moved your stops up behind the market as you added on units, you would still have been in your original trade without your stops being hit.

One of the major drawbacks with adding on multiple units is that you either leave a very wide stop loss, or you move your stops up behind the market. Moving stops up behind the market can often cause you to get stopped out of the trade on a small reversal, even though the trend is still in process.

After extensive back testing over a 25 year market history database, I proved to myself that adding units on to trades is a mistake, whether you are adding units to a losing trade or a winning trade. Adding units to losing trades inevitably causes your account to eventually go to zero, as sooner or later you will end up taking a huge loss. While the effects of adding units to winning trades are not quite so damaging, I found in every test I made that the profitability of the trading system actually went down, while the risk profile increased.

The LS Trader system takes all this into account and only trades single units. The LS Trader System does not add to losing or winning trades, therefore keeping the system stable without too much exposure to risk. Even with just one single unit per trade, the LS Trader system is extremely profitable.

In essence, a trading system that adds units is less stable, prone to larger and more frequent drawdowns and has a higher risk exposure. This is not the way to trade successfully. Stick with a single unit. If the trade goes against you then you should exit with a small loss and live to fight another day. If the trade goes in your favour, then hold it for the duration of the trade. You will still make more than enough profit from the occasional big winning trade to pay for all your losses and still leave enough over to make a handsome profit.

This leads us nicely on to Deadly Online Trading Mistake #5 which is titled “Taking too much risk”. This will be published here in the next few days.

Until then, good luck in your trading.

Phil Seaton

www.PhilSeaton.co.uk

PS. You can start a 60 day trial to the LS Trader financial spread betting system by clicking here

Here is the third part of our 7 part series titled "The 7 Deadly Financial Spread Betting Mistakes". Today we will discuss the third of the 7 financial spread betting mistakes that financial traders make:

Mistake # 3 Trading against the trend

You should never trade against the trend but should always follow the trend. There are several reasons for this. The first reason is that the price is the only instrument that takes into account all the knowledge everybody has about that particular commodity. If the price is going up then there is a reason for that. We do not need to know the reason, we only have to get on board and stay with the trend until it ends.

Conversely, if the price is going down then there is a reason for that as well. Why would we want to get on the wrong side of the prevailing trend? Traders want to be right and they want to say “I got in right at the bottom, look how smart I am”, not realising that those bottom few points that traders try to pick are the most expensive few points in history. 

If you think about it, how likely is it that you are able to pick a point near a reversal in price and that the price is just going to stop and then start moving the other way? It’s not really very likely. Far more likely is that the price will continue to move in the same direction that it is already going.

The example I like to use is that counter trend trading is like jumping in front of a fast moving train and hoping that it stops right in front of you, turns around and then starts going in the opposite direction. Why not just jump on the train in the direction it’s already going and stay on board for the duration of the journey (the trend) and then get off the train (exit the trade) when the train finally reaches its destination and starts to turn back?

This is the optimum approach and affords easy risk control, because it will soon become obvious if the trend is not going to continue and you can then exit the trade with a small loss, leaving your trading capital intact and you ready to take the next good trading opportunity that comes along.

If you are counter trend trading and are looking for the top or bottom of the market and you decide for example that Gold has dropped to $850 and you are sure this is the bottom and it has to go higher (after all only a week ago it was at $900!) you buy Gold at $850 only for it to fall to $830. If it was a good buy at $850 it must be an even better buy at $850, so you decide to open a new trade at $830 (after all this is giving you an average price of $840 which must be good!).  This process is known as averaging down. We’ll take about this in part 4 of The 7 Deadly Financial Spread Betting Mistakes.

Meanwhile, Gold falls further still. Now you have a big loss on your hands and Gold stands at $820. Using the same logic as before, you borrow some money and buy more Gold at $820. Again you are wrong and Gold falls further to $790 and therefore wipes out your account. This kind of thinking is commonplace and is the cause of most people losing all their money because people buy into the myth that things return to normal. Sometimes they do but many times they do not.

The fact remains that if you were trend following, i.e. trading in the direction of the trend then you would not have been in this position in the first place as you would have exited your trade shortly after it moved against you, taking a small loss. You would also not have averaged down (added extra trades to your original position), as this would be taking trades against the trend. Therefore you would have just taken 1 small loss, instead of several large losses, and lived to fight another day.

A very popular trading theory is buying on dips and selling rallies. This is counter trend and is a mistake. Testing this theory out over a long period of data proves that this is a losing strategy. The reason for this is that if the market falls and you are looking to buy on a dip, how do you know that this is not the start of a trend reversal? You could buy on the dip only for the market to continue to go against you. The same is true for selling rallies.

The rule here is that you must trade with the trend and therefore you must buy strength and sell weakness. Therefore you should never buy on dips or sell rallies but should wait for the momentum of the market to go your way before entering. Counter trend trading is going against the market and is best avoided.

Longevity in trading is the key as long as you have a system that has a positive expectancy, or an edge. The LS Trader system is such a trading system as it has a positive expectancy and therefore an edge. The longer you stay in the game, the more chance that edge has of coming to the fore. This leads to long term profits, which is what all traders are after.

Part 4 of the 7 deadly financial spread betting mistakes will be published here in the next few days.

Good trading

Phil Seaton

www.PhilSeaton.co.uk

PS. If you are not already subscribed to The LS Trader system, please click here for a 60 day trial subscription. The LS trader system has been built around all the points covered in this article and avoids all the mistakes that most online traders make. You can try the system out for a full 60 days and if you are not delighted with it, simply cancel and receive a full refund of your subscription.