Phil Seaton’s 7 Rules of Successful Financial Spread Betting
Here is part 4 of my rules of successful financial spread betting
4. Money management.
Money management is the continuation of the 2 previous rules. This rule regulates how much you are prepared to risk per trade when you open a trade. This means you know exactly how much you stand to lose should the worst happen and the trade go against you (although in some rare instances a market may gap through your stop forcing you to take a larger loss than you had planned for. Fortunately this does not happen very often, especially if you stick to trading highly liquid markets as I recommend.)
Most traders make the mistake of risking too much capital per trade. They then end up taking much larger losses than they needed to and when a profitable trade comes along, they have either missed it altogether due to lack of capital, or only placed too small a bet on the trade and did not make enough profit from it to pay for the losing trades.
I always believe that you should risk enough on each trade so that when you have a winning trade it is worthwhile but at the same time you are able to sleep at night. The aim is a balance between being profitable and being overly adventurous.
When we enter a trade we never know if it will be a winning trade or a losing trade, which is why we always stake the same percentage of our equity on each trade. It’s for this reason that it’s very important that you always risk the same percentage of equity per trade. Also, having a specific rule of account equity to stake will help prevent you from overtrading.
It is a good idea to calculate your account equity each time you open a trade. If you are using the LS Trader system, which is a weekly system, then you would calculate your account balance at the weekend and use that amount for every trade you enter for the forthcoming week. You would then recalculate your equity again the following weekend and so on.
The reason for this is that when the markets are trending well and we are making money, we can afford a slightly larger stake as we want to take advantage of the markets going in our favour.
Conversely, if we are in a bad spell and the markets are not trending well, then we will be using smaller bets through this period. This keeps your trading capital safe for when the markets start trending well again. This is an extension of the cutting losses and letting our winners run, but instead of applying this to each trade, we apply it to our overall account balance as well.
Following this rule makes us more profitable at the end of the year as we will be using larger bets when things are going well and smaller bets when things are going against us. As I have written before, the markets only trend around 40% of the time, so using this rule will help us to cut back our risk and exposure when the markets are not trending but enable us to be a little bit more aggressive when the markets are trending.
Let’s say that at the weekend your account equity is £25,000 and you are therefore risking 2% per trade, you calculate 2% of £25,000 which equals £500. You stake £500 as your maximum loss for every trade you enter that week. Come the following weekend, you have had a good week and your account equity has gone up to £29,000, you then take 2% of £29,000 = £580. You then risk £580 on every new trade for the week ahead.
When you have a trading system that has a positive expectancy, like the LS Trader system, the most important thing is to make sure that you stay in the game. By doing this you ensure that you give the system time for the positive expectancy to come to the fore and for you to make money.
You must always remember that if you lose all your chips you can’t play, so you must keep in mind the risk that you are taking, not just on individual trades, but on all your trades combined. A good trading system will have specific rules to take all of this into account when deciding which trades to take.
ALWAYS REMEMBER TO APPLY MONEY MANAGEMENT. IT’S VITALLY IMPORTANT TO YOUR SPREAD BETTING SUCCESS.
My fifth rule of successful financial spread betting will be published on this blog soon.
Good luck in your trading