Phil Seaton’s 7 Rules of Successful Financial Spread Betting
Here is part 6 of my rules of successful financial spread betting
6. Ignore the news & fundamentals
Fundamental analysis is for the most part useless and very few traders can make money using this approach. Even if you could it would take you an inordinate amount of time studying reports, balance sheets, crop reports etc. This is not the way to trade. The same goes for following the news because usually the market has already discounted the news in the price. Many times you will hear very bullish news on a stock and then see it fall over the coming days.
It is also difficult to know what reports/news are actually true, and even if you know what is true how can you be sure that your interpretation of the news is correct? What about timing? Even if you have good reliable knowledge and a true interpretation of the news, how do you know when to act on it?
As strange as this may seem, there is no need to follow the news or study fundamental reports on any market that you trade. It is not even necessary for you to know why a market is going up or down, you only need to notice that it is. This is another advantage of trend following as a trading system in that not only is it highly profitable, but it can be done in less than an hour per week. The added bonus of this is that it is therefore far less stressful.
If something is happening in a certain market or in a certain stock, then before long this will start to be reflected in the price. If something good is happening in a stock or the supply and demand for a particular commodity is going out of balance and there is more demand than supply, then the price will start to rise.
Sooner or later a trend following system such as LS Trader will pick up on the price rise and issue a buy signal. The system will follow the trend and stay long until the market reverses at which point the system will exit with most of the profits from the move intact.
The same is true for markets that are struggling. In January 2008 there was a change of trend in the stock markets according to the trend definition rules that we use at LS Trader and the LS Trader system issued sell signals on the major stock indexes like the FTSE 100, Dow 30 and the S&P 500. The LS Trader system in fact gave a sell signal and went short on all 6 of the indexes that we trade before the end of January 2008.
Now, and this is the key point, the credit crunch was already around by then but few if any at that point knew the magnitude of bad news that was coming, but the stock markets had already turned south, essentially telegraphing a signal that we were on the verge of a decline. We, at LS Trader were short and stayed short for much of 2008 and caught a large part of the bear trend.
This just goes to show that sometimes trends develop ahead of the news and that by following trends you can actually get in ahead of the news to make a profit. It was not necessary to be following the news last year to be able to take advantage of the bear market, it was only necessary to observe that a new downtrend was beginning, enter the markets short and stay short until the trend reversed and started going up again.
Perhaps the most damaging aspect of fundamental analysis is that it does not afford any risk control. See my example of gold in the first of my trading rules (below) as it applies equally well here. As the price moves further away from your idea (assuming that you were using fundamental analysis and had reached a conclusion on market direction), i.e. you thought the market was a buy at $845 and it drops to $830, it must be an even better buy. The market then drops to $820 and looks like a better buy still and so it goes on. If you are trading correctly, you would just get out of the trade as you would know that you are wrong.
The LS Trader system will automatically get you in to the market when the conditions are optimal. It will also get you out of the market if things are not going for you with a minimal loss. Trading the LS Trader system, you will never have to take any big losses, but you will certainly get some big winners!
REMEMBER: ALWAYS IGNORE THE NEWS AND THE FUNDAMENTALS.
My seventh and final rule of successful financial spread betting will be published on this blog soon.
Good luck in your financial spread betting