Phil Seaton’s 7 Rules of Successful Financial Spread Betting
Here is part 3 of my rules of successful financial spread betting
3. Cut losses
This is where most traders and trading systems fall down. You must cut your losses. You must never move your stop loss back when the price is approaching your stop loss to keep you in a trade in the hope that the price will turn around. Occasionally this may happen but over time you will lose more money. In some instances this style of trading will usually lead to you taking such a large loss that you cannot recover from it.
The key to consistent profit making in the markets is that your winning trades must be larger than your losers. If you keep your losses small and let your winners run this is easily achievable.
If you make 10 trades risking a £1000 per trade and the following happens
5 trades lose at £1000 per trade = -£5000
1 trade breaks even = £0
1 trade makes a £1000 profit = £1000
1 trade makes a £2000 profit = £2000
1 trade makes a £3000 profit = £3000
1 trade makes a £5000 profit = £5000
You have only been correct on 4 trades out of ten and you lost £5000 on your 5 losing trades, but you won £11000 on your 4 winning trades. You are £6000 in profit for ten trades. This shows you the value of cutting losses short and letting winners run. Most people want to be right all the time and look for a system that gives them 8 or 9 winners out of 10 (I have yet to see such a system!). I am not interested in being right, I am only interested in making money and you should be too.
If I were to offer you the chance to make £11000 out of every ten trades that you made and lose only £5000, meaning that you would be £6000 in profit every ten trades made I hope that you would jump at the chance to play this game all day long. This example is only hypothetical, but it gives you an idea of what this trading system is about. It is possible to be wrong 7 times out of 10 and still make money if you will follow the rules.
The above is just an example but over time, trading does work out usually somewhere along these lines. As an added advantage of trading this way, every so often you get a huge trade that pays out many more times your initial risk. Usually each year we get a handful of outsized winners which we class as home runs.
In the example above I have only included 1 trade winning at 5 times the original trade. In 2008 we had several trades that paid off at 9 or 10 times the original stake and one that we recently exited, the short GBP/JPY trade that paid out around 22 times the original stake.
One concept that must always be kept in mind is the risk of ruin. Many traders overtrade both in frequency of trades and size of trades. They stake far too much on each trade and therefore end up taking big losses. This approach often leads to traders wiping out and losing all their account equity.
The right approach is to risk only a small percentage of your trading capital on each trade and set an initial stop loss and stick to it, never moving your stop loss back to stay in the trade. This way you will ensure that you stay in the game and make sure that you have the chance to catch some big winners and make profits.
If you have a good trading system which has a positive expectancy, then the key point is to stay in the game long enough for this positive edge to work in your favour. If you lose all your chips you can’t play. Therefore you must be conservative, both with your risk per trade and your account equity on the whole.
REMEMBER ALWAYS: CUT YOUR LOSSES SHORT AND LET YOUR WINNERS RUN
My fourth rule of successful financial spread betting will be published on this blog soon.
Good luck in your financial spread betting