Phil Seaton’s 7 Rules of Successful Financial Spread Betting
Over the next few weeks I will publish my 7 rules for successful financial spread betting. These trading rules are timeless and will always be valid in the markets, regardless of market conditions or the state of the economy. One of the great advantages of trend following is that you can make money in an up or a down market, either by buying long or going short.
If you trade across a portfolio of different instruments or markets such as stocks, forex or commodities you will often find that one sector is trending up and another is trending down. This means that there are nearly always opportunities for trading, especially if you have the added flexibility of going short (selling)
These 7 rules must be followed consistently if you want to be a successful trader. Regardless of the trading system that you are using there will always be losing trades and even losing periods. You will find it much easier to continue trading through these losing periods if you have a set of rules or sound trading principles to fall back on. I believe that these 7 rules are the cornerstone to successful trading.
The LS Trader system is based on and incorporates these rules to help make you a consistently profitable trader.
Here is rule 1 of my 7 rules of successful financial trading:
1. Trade with the trend.
You 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 or market. This is reflected in the price. 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.
The same holds true for when a market is going down. As with long trades for riding up trends, we can short a market and take advantage of downtrends.
It’s not just financial markets that move in trends. There is evidence for trends elsewhere such as with interest rates. When the Bank of England decide to increase or decrease interest rates they don’t usually raise them one month and cut them the month later. They usually start in one direction and keep going as we have seen recently with a succession of cuts.
There is a principle in physics which states that an object in motion tends to stay in motion. In trading terms this means that once a market starts to move in a certain direction there is an increased probability that the market will continue to move in that direction.
Markets do move in trends although certainly not all the time. However, markets trend often enough that when they do trend and a big trend emerges, the profits from riding that large trend will cover the small losses that occur when the market fails to trend.
How can we know how long a trend will last or when the trend will end? We can’t. That is why trend following systems have rules incorporated to identify when a trend has ended and specific rules for when to exit a trade.
Trend following also has the added advantage of enabling risk control. I will discuss this later in another of my trading rules regarding money management. This is one of the huge benefits that trend following has over fundamental trading.
Let’s say for example that you are looking at Gold and your indicators or research leads you to believe that Gold is going to move higher. You decide that Gold has dropped to $845 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 $845 only for it to fall to $830.
If it was a good by at $845 it must be an even better buy at $830, so you decide to open a new trade at $830 (after all this is giving you an average price of $837.50 which must be good!). 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 a major reason for many 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.
If you had been trend following, you would not have taken any of these trades and would not have lost any money. You would have waited for some strength to buy the market and would have followed the trend.
There are of course many different time frames for trends and this will depend on your particular trading style. There are short term, medium term and long term trends. I personally prefer to trade based on the medium to longer term trends as I find these more profitable and less prone to false breakouts.
REMEMBER ALWAYS TO BUY STRENGTH AND SELL WEAKNESS. This is counter
to our natural tendencies as people are always looking for a bargain. In trading there is no such thing as the market is always right so the price in any given moment represents the value of that particular instrument at that particular time.
My second rule of successful financial spread betting will be published on this blog soon.
Good luck in your trading