Today we’re going to look at the importance of having and following a spread betting system in order to ensure that we catch the big winning trades. We’re going to look at a real world example to illustrate the importance on this and how not following a system negatively affected one of the world’s top traders. In our last post on Stanley Druckenmiller, we commented that Druckenmiller had decided to close his hedge fund due his inability to make outsized returns over the past 3 years which he put down to very unfavourable market conditions.
One of the factors that have negatively impacted his performance this year is that, by his own admission, he missed the move in treasuries. Since treasuries have been the biggest and best trending markets this year that has been a fatal mistake. This does highlight a very important lesson for traders and that is that you must have a trading system, or in our case a spread betting system with specific trading rules and the discipline to follow it consistently.
A good spread betting system should include each of the following:
- Which markets to trade
- When to enter a trade
- When to exit a trade
- How much to stake on each trade
- How to know when to stay out of a market
Once you have a spread betting system that incorporates the above rules, all you have to do is follow it consistently. My guess is that either Druckenmiller was relying on discretionary reasons for entering trades rather than specific rules, or his system indicated an entry but he chose to skip the trades because he did not like them for some reason.
This is in fact where many traders fall down and the mistake can be fatal, as seen by the negative impact that skipping these trades has had not just on Druckenmiller’s performance, but on him emotionally as well and these factors may have led to him calling it a day.
In reality, nobody can be sure when entering a trade whether it will be successful or not and this is why once you have a spread betting system it is important that it is followed consistently. One can never tell in advance when the big moves are going to come and if you skip a trade for any reason and it goes on to be a big trend and a big winner you are in trouble.
One of the underlying principles of successful trading is that it is always better to risk taking a small loss than it is to risk missing a big winning trade. If the spread betting system used is good then only a small percentage of trading capital should be used for each trade, for example 2%.
If one is only risking 2% equity per trade then taking a loss of that amount is not too painful. Conversely, if a trader misses a trade that goes on to be for example a 10 to 1 winner, as may be the case in the current treasury trades then that equates to 10 x 2% of missed opportunity. That is far worse than risking the initial 2% loss. It is compounded if there are a handful of correlated markets such as in the case of treasuries, the 5 year note, 10 year note and 30 year T bond. Missing out on one trade is bad but missing out on all three is fatal. That is why we say it is always better to risk a small loss than it is to risk missing a big winning trade.
Because the markets only trend around 40% of the time all trend following systems will have more losing trades than winning trades. Therefore to make money you must have the big winning trades and ensure that you catch them when they come. If you don’t, you have no way to pay for the losing trades. This is why you must have specific rules to enter trades and rules to ensure that you don’t miss any trades.
Our spread betting systems, whether it is our forex system or our primary financial spread betting system for multiple market sectors both include rules to ensure that big trends are not missed and that trades are allowed to run to extract the maximum profit potential of each move. So, the question to ask yourself is “am I using a good system and do I have the discipline to follow it consistently?”. If you can answer yes to both then you are on the road to trading success.
Until next time, good trading