Phil Seaton’s 7 Rules of Successful Financial Spread Betting
Here is part 2 of my rules of successful financial spread betting
2. Let Winners Run
When trading the markets, we never exit a trade at the top because there is no way of knowing where the top is in advance. You can only ever tell where the top was in a market after the event. Many times a trade will get so high and you will think it cannot go any higher only for it to continue on and on and on. Sometimes markets go on such long trends that it defies reason. A trend can go on for months or even years.
We don’t even need to know the reason for the trend, only that it is in progress and we want to stay on board until the trend comes to an end. Long trends are usually formed when the supply and demand balance goes out of whack. Markets can also trend for long periods based on greed and fear. Market participants see a market rising and their greed causes them to keep buying the market, or they buy through fear of missing out.
The same is of course true with short trades where a market price gets so low that you think it cannot go any lower. Obviously, commodities are never going to go to zero but stocks can. Commodities can though go to very low prices, especially when they are out of favour. Recently we have seen a collapse in the commodity markets with some markets dropping around 75% in the space of a few months.
If we got out where we thought the top or bottom was then we could be leaving a large chunk of profit still on the table. If somebody tells you that they know where the top of the market is (or the bottom) I advise you to ignore them. The future cannot be predicted because as yet it does not exist. The best policy is to let your trades run and exit when the trend reverses.
The only way to consistently make money in the markets is for your winning trades to be larger than your losing trades. To do that you have to let your winning trades run so that you can extract the maximum profit out of each market. Occasionally this will result in some hugely profitable trades and that at the end of the day is what we’re after.
In trading you will at the very best end up with a 50% win rate and even this is being generous. After all, even lungs lose air around 50% of the time! Even if you apply the 50% win rate to your trading, your winners would have to be larger than your losers otherwise you could not possibly come out in front. In reality, traders are probably right closer to 40% of the time or possibly even less. This makes it even more important that you allow your winners to run.
If you never let a winning trade run you can never get big winners, as you will have taken your profits too quickly. There is a saying that you never go broke taking a profit. This is a fallacy. I say that taking profits prematurely is the way to go broke as you will have no way of paying for the losing trades without big wins!
Traders often fear that they will give back a percentage of their profits on a trade if they let their profits run. Sometimes it is necessary to give back a percentage or even all of your profits on a trade. You may even have a winning trade turn in to a loser and this does happen if you are following a trend following system correctly.
Many people talk about not letting winning trades turn in to losing trades and that once they go in to profit they move their stops up to break even. This is again a fallacy as doing this can cause you to exit a trade prematurely on a slight reversal. I never understood why people think that getting out even is so important anyway. It can only be from the perspective of not wanting to be wrong.
A trader must be willing to be wrong more often that he is right, but is able to be profitable trading in this way by allowing his winning trades to grow, so that they are larger than the losing trades. In this way, a trader can be wrong 7 times out of 10 trades but still end up ahead.
This is trend following in a nutshell. Identify a trend, jump on board and ride the trend. If the market reverses after you have entered simply exit when the market hits your initial stops. If the market goes on and trends, let your trade run and bring in some big winning trades. If you do this consistently you are stacking the odds in your favour that over time you will come out in front.
It is of paramount importance to the long term profitability of a trading system that we have the occasional huge win. This is only possible if you let your winners run. If you are in the habit of taking your profits when they are still small for fear of giving them back then you will never have any big winners as a small profit needs time to grow into a big profit. Remember, one huge win pays for a lot of small losses.
REMEMBER ALWAYS: LET YOUR WINNERS RUN.
My third rule of successful financial spread betting will be published on this blog soon.
Good luck in your financial spread betting