Here is the sixth part of our 7 part series titled “The 7 Deadly Financial Spread Betting Mistakes”. Today we will discuss the sixth of the 7 financial spread betting mistakes that financial traders make:

Mistake #6 Day trading – what all day traders should know

A large percentage of people who trade online or use financial spread betting are short term or day traders. With few exceptions these traders lose money. The reasons for this are simple enough but go against the grain of what most people believe or want to believe. This is therefore a controversial post, but it reflects my experience of what works and what does not work in online trading and financial spread betting.

Day Trading has been made popular by brokers and trading firms as each time a trade is placed these firms earn a commission. Earning commissions for these firms is the name of the game. In financial spread betting you are charged a spread (commission) each time that you open or close a trade. It is therefore obvious that these firms want to encourage you to trade frequently, as this is how they make their money.

All of these commissions or spreads reduce the profitability of a trader or trading system. Systems or traders which trade frequently generate very high commissions, making it that much harder to make a profit.

What is needed is a system that trades frequently enough to make good profits without generating too many commissions by constantly going in and out of the markets. The irony is that the shorter the time frame you use as your trading indicators i.e. whatever indicator you use to give you your buy/sell entry signals, the weaker the signal is. So, day trading systems use the weakest trading signals and at the same time generate the highest transaction costs.

Day Trading therefore is a low performing style of trading as the signals are weak, but a high transaction cost generating style, the net result of which makes money for the brokers and spread trading firms but leaves the traders with empty pockets and diminished bank accounts.

The alternative is a trading style that uses stronger signals (medium to long term) and therefore trades less frequently, generating lower transaction costs. Now you have a system that generates greater profits and has lower costs which equates to a profitable trading system. This style of system is good for the trader but not so good for the broker.

It is little wonder then that everywhere you look, short term or day trading systems are promoted, but you rarely hear about medium to longer term systems. Another reason for this is the software vendors and people who want to sell you real time data. To trade profitably you only need end of day data. There are numerous sources on the internet where free end of day charts and prices are available.

You do not need real time data and it is in fact a very bad idea as it leads you to trade too frequently. Ed Seykota, the legendary trend follower once said that having a real time quote machine is akin to having a slot machine on your desk in that you end up feeding it all day long.

The problem with real time data and day trading apart from what has been discussed already is that you are too close to the market. You are in fact so close that you can’t see what’s really happening. Imagine holding a chart in front of you and pulling right up to the end of your nose. You can’t really see what’s going on, but as soon as you move the chart away to about arms length everything becomes clear. You can now see the trend and direction of the market.

Consider the following and see which conveys more about the state or direction of the market

1.      1 minute bar chart

2.      5 minute bar chart

3.      30 minute bar chart

4.      Hourly bar chart

5.      Daily bar chart

6.      10 day bar chart

7.      50 day bar chart

It should be obvious that the information contained in a 1 minute chart is less relevant to the state of the market than a 50 day bar chart. If a market hits a 30 minute high this is clearly less significant than a 50 day high. If a market hits a 50 day high then clearly something is going on in that market which is causing it to rise.

It can be seen from the above that the shorter the time frame (within reason) the weaker the information and the longer the time frame (within reason) the stronger the information. What is therefore needed is an intermediate indicator because as we have seen a short term signal is virtually worthless and no better than random, whilst an extremely long term indicator would severely limit your trading options.

There are numerous indicators that can be used, whether we are using highs and lows over a certain number of days, or moving averages. The same holds true with moving averages as with highs and lows over a period of days. A 5 day moving average indicator is clearly a weaker indicator than a 200 day moving average.

We must also consider that if you are day trading, the maximum amount of profit that you can make on a trade is how far the market can move in a day (most day traders are reluctant to leave trades open overnight and close them before the end of the trading day). Whereas if you are using a medium to long term system you could be in a single trade for weeks or even months, meaning that the potential profits from a trade are many times what can be made in a single trading day.

The LS Trader system, which is a medium term trend following system is often regularly in trades for months. In fact, in 2008 the average duration of a winning trade was just over 80 days. Consider for a moment how much profit each trade is likely to generate if it is open for an average of 80 days whilst at the same time how little spread is paid. The spread is paid upon opening and closing of the trade and a reduced spread paid for rolling the contract over, which in many instances is quarterly.

Compare this to day trading where spread is paid each time a trade is opened and closed throughout the day. It should be self evident that a day trading system has to perform well just to cover the transaction costs. In my experience day trading systems rarely generate enough profit to pay for the transaction costs, let alone leave enough after costs to show a profit at the end of the year.

In addition to the facts that day trading systems are low profit and high transaction cost generating must be added the fact that if you are day trading you have to sit in front of the screen for 8 hours a day. This is extremely time consuming and also highly stressful. This is not the way to trade, either from a profitability angle or a lifestyle angle.

The LS Trader system is a medium to long term trading system that only trades on a weekly basis. Trades are opened on Mondays with stop losses set. Traders can then go away and do whatever they want and not need to do anything on their account until the following week. This leads to low commission generation and high profits.

Next we will discuss Deadly Financial Spread Betting Mistake # 7 “Listening to the news and fundamental analysis”

Until next time, good luck in your trading

Phil Seaton

PS. You can sign up for the LS Trader financial spread betting system here. The system comes with a full 30 day money back guarantee.

Here is the second part of a 7 part article I have written titled “The 7 Deadly Financial Spread Betting Mistakes”. Today we will discuss the second of the 7 financial spread betting mistakes that financial traders make:

Mistake # 2 Taking profits too soon

A good trading system will never exit a trade at the top because there is no way of knowing where the top is. 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. If we got out where we thought the top was then we would 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. There are any number of factors that contribute to continually rising prices in the stock and commodity markets and these cannot be predicted by any technical indicator, chart analysis or fundamental analysis.

The same goes for continually falling prices in the stock and commodity markets. As I have already covered in previous posts here, when a market is in decline such as most commodity markets at present or any of the world’s stock indexes there is no way of consistently predicting where the bottom of the market is. If you are in a short trade and the market is going down, you have to stay short until you get confirmation that the trend has changed. Nobody knows where the bottom of any market is in advance.

This is why we have to leave our trades open when they are going in our favour and let our profits run until we get confirmation that the trend is over. This means that we must necessarily never get out at the top (or at the bottom in the case of short trades) and must always give back some of our profits.

This is not always easy to do but it is important to remember that when a market reverses and starts eroding your profits it does not mean that the trend has reversed, only that the market is going against you at that particular time.

Most traders find that it extremely hard to risk giving back profits and they therefore take their profits too soon. This inevitably cuts out the chance of having big winning trades, which are of paramount importance to the profitability of a trading system. This is why we need a trading system with specific rules and the discipline to follow that system.

The LS Trader system is such a trading system and it has all the rules contained within the trading system to lead to long term profitable trading. The discipline to follow that trading system has to come from the trader. Each trade must be taken as per the system and trades must be left to run until the predetermined stop loss is hit, at which point we must exit the trade.

The rules of successful financial spread betting are simple but they are not so easy to follow. As we discussed in mistake # 1, when you have a losing trade the temptation is to give the trade a bit more room in the hope that it turns around. Traders find it hard to take losses and therefore move their stops back. This almost always leads to taking bigger losses than are necessary and has a drastic impact on the long term profitability of the trading system.

Equally as hard is the prospect of giving back good profits but, so traders take their profits off the table as soon as they reach a fair size. This is fatal to profitable trading. In trading you must do the hard thing. If something is easy to do, such as cash in profits for example it’s almost certainly the wrong thing to do.

Remember, one huge win pays for a lot of small losses. A good trend following system such as the LS Trader system will generate several large winners each year. A good way to look at this is from the following example:

Let’s assume that we are going to risk £200 on every trade. Our risk then is £200. For this example, let’s call risk R. Therefore 1R is £200. At worst we know that we will exit our trades with a 1R loss as that is where we put our stops when we place the trade.

For our example we are going to trade Wheat. Let’s say that we buy Wheat long at 900 and our stops are at 850. Therefore 1R also equals 50 points. If the trade advances over time and we finally exit at 1400, we have 500 points of profit or 10R. If 1R equals £200 then we have a £2000 profit.

This in effect means that we can now have 10 trades that lose a full 1R and we will still be at break even. This is the dynamic in action of cutting losses short and letting winners run. During the course of the year it is not uncommon to get several winners that pay 10R or even more.

In addition to this, if your trading system is set up correctly, not all losing trades will lose a full 1R as sometimes the stops will have been tightened before exiting and you may only lose 1/2R on some trades or even less. This increases the edge of the trading system and increases the positive expectancy as it keeps the losses much smaller than the winners on average.

Taking a trade from last year, the British pound/Japanese yen trade, we entered the pound short against the yen at 20560 on the 18^th August 2008. Our original stops were at 20850. Therefore 1R was 290 points. We finally exited the trade on the 6^th January 2009 with a profit of 6426 points, which if we divide by 290 we have a 22.16 R trade, or a trade that has returned over 22 times our original risk.

We also had numerous other trades that returned 10R plus. These trades pay for a lot of losing trades and leave plenty left over for profit. This highlights the importance of letting your trades run and not cashing in your profits too soon because if you always cash in a small profit you can never get a large profit.

This wraps up financial spread betting mistake #2. In the next part we will look at another deadly financial spread betting mistake “Trading against the trend”.

Until then, good luck in your trading.

Phil Seaton

PS. If you are not already a subscriber to the LS Trader system, please click here to sign up.

This is the first part of a 7 part article I have written titled “The 7 Deadly Financial Spread Betting Mistakes”. This 7 part series should be read in conjunction with my previously posted 7 Rules of Successful Financial Spread Betting

Today we will discuss the first of the 7 financial spread betting mistakes that financial traders make.

Mistake # 1 Giving losses more room

This is one of the biggest mistakes, if not the biggest mistake a financial trader can make. You must cut your losses short. 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 by giving your trade more room.

In some instances this mistake can lead to you taking such a large loss that you cannot recover from it. The important thing is to never take a big loss. You can ensure that you never take a big loss but cutting your losses short and sticking to your pre determined exit point.

One of the main reasons that traders move their stops back is their unwillingness to admit that they are wrong. They would rather move their stops back in the hope that the market turns around even if this means they take a bigger loss than they would have previously than take a loss. This is such a huge mistake that it can’t be overemphasised how important it is not to do this.

I often think that many traders are more concerned with their egos than their profits as they are more concerned with being right than they are with making money. This prevents them from admitting they are wrong on trades and taking losses. This accounts for a lot of the nonsense that is out there pertaining to a high percentage of winning trades.

A high percentage of winning trades is in fact a fairly meaningless statistic as what really counts is how much you make when you win and how little you lose when you are wrong. These systems of high winning trade percentages have it the wrong way around in that when they win they win small but when they lose they lose big. This is the opposite of how successful traders and trading systems work.

You must trade with a plan. You must decide where you are getting out of a trade before you enter it. You must decide how much you are going to risk on a trade and then stick to that plan. It is imperative to add a stop loss to your trade when you open it, and not adjust your stop regardless of what happens.

You must always decide before opening any trades how much of your account equity that you are going to risk on any particular trade and must set your stops accordingly. If the market approaches that level you must resist the temptation to move your stops back and stick to your system.

Traders suffer from what I call immediacy bias in that they always want to improve the trades that are right in front of them that they have open on their accounts now. The current trades for that reason seem to take on more importance than they should. It’s just another trade and when viewed from the larger picture of the few hundred or so trades that a trader will make during the course of the year, it’s not so important.

What is important is sticking to your trading system and trading rules as it is the consistency in following these rules that brings in the profits over time. If your trade goes wrong, admit that you were wrong and take your medicine and exit the trade. This way you can live to fight another day and give the positive expectancy that your trading system has the chance to come to the fore.

It’s the staying in the game over the long period that makes the money. A trader must always be mindful of the risk of ruin as the worst thing that can ever happen to a trader is that he loses his money and can no longer trade. By sticking to a good trading system and consistently following the trading rules of that system this should never happen.

With financial spread betting, it is even easier to move your stops back to keep you in a trade when it is going against you as you only need to spend 2 seconds adjusting your stop on your financial spread betting account, rather than having to pick up the phone to speak to your broker. You must resist this temptation and have the discipline to stick to your trading system.

The more mechanical and automated your system is the better you will be as a trader. This means that you should always exit your trades via the stop loss whether it is for cutting a loss or for taking a profit. Remove emotion and discretion as much as possible from your trading and you will be much more successful and profitable as a trader.

If you cut your losing trades short and allow your winners to run, your losing trades will be smaller than your winning trades. This will mean that you can afford to be wrong more often than you are right and still end up making money.

I will be posting the second of the 7 financial spread betting mistakes in the next few days.

Good luck in your financial spread betting

Phil Seaton

PS. Click here to sign up for a 30 day trial to the LS Trader Financial Spread Betting System

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

Phil Seaton

P.S. You can sign up for the LS Trader system here. The LS Trader system includes all 7 of my rules for successful financial trading

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Here is part 5 of my rules of successful financial spread betting

5.    Always follow the trading system

If you want to be successful when trading the markets you must first have a trading system that works and you must have the discipline to always follow that system, come what may.

A good and robust trading system should have been vigorously back tested over a fairly large amount of market data. I suggest a minimum of 10 years but more is better. In my own system development I use a 25 year database spread across numerous markets. This is the database used to create the LS Trader system.

Whilst the back testing of a system does not and cannot predict what will happen in the future, if testing is done over a sufficient sample of data then it can give you a very good indication of what to expect.

After all, what is the opposite of back testing? No testing is the opposite, which is just like trying to trade the markets blind and you are trading based purely of hunches and guess work. This “seat of the pants” trading is highly unlikely to be successful in the long run. It is also much more difficult to keep trading when you go through a losing spell if you do not have a specific system or rules to follow and just rely on your gut.

A good trading system should have specific rules for each and every situation or sequence of events that may come up in the markets so that you should always know what to do in any given situation. In fact, a good trading system should mean that you don’t need to sit in front of the screen all day long as it should not be short term and should use stops. You should have stop losses set so that whatever happens you know exactly where you are getting out of any positions that you may be in.

Back testing often gets bad press as people often assume that what is being done is curve fitting i.e. looking at a chart and saying if you bought here and sold here then you would have made x amount. They then make rules based on the specific data to come up with a system that performed very well in the past on the market tested.

This obviously has little if any value. That is not real back testing. In true back testing you would come up with a set of rules and then run that over a period of data and see what the results are. You then change around the parameters of the system until you come up with what appears to be the best parameters.

To ensure that the financial spread betting system is not curve fitted you must change the markets that you tested it over by either adding or taking away some markets, test over more or fewer markets and then finally change the period of the test.

You can test against a shorter or a longer period by changing the start or end date of the test or by testing the data in the middle of the data range. If you run all these tests and you are still getting fairly similar results without a dramatic shift in the performance of the system then you have a good robust trading system that is not curve fitted and that is much more likely to give similar performance in the future as it has in the past.

By using proper back testing you will have an idea of what to expect from the trading system that you are trading, both in terms of profit potential and in terms of equity drawdown. A drawdown in equity is from the high point of your equity to the low point and is measured both in percentage of equity and in the time it takes to recover from the low point of equity to make new equity highs.

All systems will have drawdowns and losing periods. It is a fact of a trader’s life and has to be accepted. If you know that a system has a positive expectancy and what the likely drawdowns will be then you can prepare in advance. If you don’t like the drawdowns of the system that you have or find it uncomfortable to keep trading through them then you can reduce your trading size until things fall within your comfort level.

If the drawdowns are likely to be beyond your comfort level then you will find it difficult to keep following the system through losing periods and are best to reduce your risk per trade in advance.

The entries and exits in a trading system have been calculated for a reason and you must always follow them. For example, if your trading system shows that you trade the British Pound and a new signal comes along saying that you should go long the pound, but you don’t like the trade because you think it’s too high already (or have heard some news report saying the pound won’t go any higher or some so called expert has said that the market is over- bought!) you should still take the trade. You must be willing to follow a trend.

It is vitally important to take all the signals which are generated by the trading system, irrespective of your opinions on that particular market or the price that the market is currently at. Consistency is the name of the game. It is always a good probability that the trade you do not take will be one of the big trends of the year and failing to take the trade can have a huge impact on the profitability of the system.

REMEMBER IT IS ALWAYS BETTER TO TAKE A SMALL LOSS THAN IT IS TO MISS A BIG PROFIT OPPORTUNITY.

For those readers who don’t have the time, knowledge or interest in developing their own robust trading system, I have already done all the work for you and have created a complete, robust trading system based on vigorous back testing over 25 years of data. I have also been trading this system myself and it has performed exceptionally well. To learn more please about my trend following system please click here.

My sixth rule of successful financial financial spread betting will be published on this blog soon.

Good luck in your spread betting

Phil Seaton

PS. The LS Trader system incorporates all of my trading rules. You can sign up for the LS Trader system here. The system comes with a 30 day 100% money back guarantee and can be followed in as little as 15 minutes per week.

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.

Example:

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

Phil Seaton

PS. The LS Trader system incorporates all of my rules for successful financial spread betting. You can sign up for the LS Trader system here. The system comes with a 30 day 100% money back guarantee and can be followed in around 15 minutes per week.

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

Phil Seaton

PS. You can sign up for the LS Trader system here. The system comes with a 30 day 100% money back guarantee and can be followed in around 15 minutes per week.

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Over the next few weeks I will publish my 7 rules for successful financial spread betting. These trading rules are timeless and will always be valid in the markets, regardless of market conditions or the state of the economy. One of the great advantages of trend following is that you can make money in an up or a down market, either by buying long or going short.

If you trade across a portfolio of different instruments or markets such as stocks, forex or commodities you will often find that one sector is trending up and another is trending down. This means that there are nearly always opportunities for trading, especially if you have the added flexibility of going short (selling)

These 7 rules must be followed consistently if you want to be a successful trader. Regardless of the trading system that you are using there will always be losing trades and even losing periods. You will find it much easier to continue trading through these losing periods if you have a set of rules or sound trading principles to fall back on. I believe that these 7 rules are the cornerstone to successful trading.

The LS Trader system is based on and incorporates these rules to help make you a consistently profitable trader.

Here is rule 1 of my 7 rules of successful financial trading:

1.    Trade with the trend.

You should always follow the trend. There are several reasons for this. The first reason is that the price is the only instrument that takes into account all the knowledge everybody has about that particular commodity or market. This is reflected in the price. If the price is going up then there is a reason for that. We do not need to know the reason, we only have to get on board and stay with the trend until it ends.

The same holds true for when a market is going down. As with long trades for riding up trends, we can short a market and take advantage of downtrends.

It’s not just financial markets that move in trends. There is evidence for trends elsewhere such as with interest rates. When the Bank of England decide to increase or decrease interest rates they don’t usually raise them one month and cut them the month later. They usually start in one direction and keep going as we have seen recently with a succession of cuts.

There is a principle in physics which states that an object in motion tends to stay in motion. In trading terms this means that once a market starts to move in a certain direction there is an increased probability that the market will continue to move in that direction.

Markets do move in trends although certainly not all the time. However, markets trend often enough that when they do trend and a big trend emerges, the profits from riding that large trend will cover the small losses that occur when the market fails to trend.

How can we know how long a trend will last or when the trend will end? We can’t. That is why trend following systems have rules incorporated to identify when a trend has ended and specific rules for when to exit a trade.

Trend following also has the added advantage of enabling risk control. I will discuss this later in another of my trading rules regarding money management. This is one of the huge benefits that trend following has over fundamental trading.

Let’s say for example that you are looking at Gold and your indicators or research leads you to believe that Gold is going to move higher. You decide that Gold has dropped to $845 and you are sure this is the bottom and it has to go higher (after all only a week ago it was at $900!) you buy Gold at $845 only for it to fall to $830.

If it was a good by at $845 it must be an even better buy at $830, so you decide to open a new trade at $830 (after all this is giving you an average price of $837.50 which must be good!). Gold falls further still. Now you have a big loss on your hands and Gold stands at $820. Using the same logic as before, you borrow some money and buy more Gold at $820. Again you are wrong and Gold falls further to $790 and therefore wipes out your account.

This kind of thinking is commonplace and is a major reason for many people losing all their money because people buy into the myth that things return to normal. Sometimes they do but many times they do not.

If you had been trend following, you would not have taken any of these trades and would not have lost any money. You would have waited for some strength to buy the market and would have followed the trend.

There are of course many different time frames for trends and this will depend on your particular trading style. There are short term, medium term and long term trends. I personally prefer to trade based on the medium to longer term trends as I find these more profitable and less prone to false breakouts.

REMEMBER ALWAYS TO BUY STRENGTH AND SELL WEAKNESS. This is counter
to our natural tendencies as people are always looking for a bargain. In trading there is no such thing as the market is always right so the price in any given moment represents the value of that particular instrument at that particular time.

My second rule of successful financial spread betting will be published on this blog soon.

Good luck in your trading

Phil Seaton

PS. You can sign up for the LS Trader system here. The system comes with a 30 day 100% money back guarantee.

Since posting the article on my blog about the bottom of the stock market a couple of days ago I have received numerous emails on the subject so I thought I would expand on it a bit and give some further thoughts.

The one big question I have and would like to put out to everybody for them to think about is why is it so important to buy the bottom of the market anyway? I believe that the reason people are looking for the bottom is ego based and not profit based. People want to be right and say “look how smart I am, I bought the bottom of the stock market”.

Instead of trying to be “right” traders should be concentrating solely on making money. The fact remains that the best traders are those with a relatively low win percentage i.e. they are wrong more often than they are right, but when they are right that make more money than they lose when they are wrong and the difference is their profit.

As I have written before, the markets trend around 40% of the time and that is about the same as the percentage of winning trades that a good trader or trading system will produce. This is roughly the percentage of winning trades that the LS Trader system produces but over time the system is well ahead of the game.

Currently the trend in the stock markets is down. The long term trend and the short term trend is down so there is no reason as far as I can see for people to be trying to fight these trends and buy this market right now.

I believe that the trend in stocks is going to be down for a while yet and I don’t see the LS Trader system giving a buy signal on stocks for the rest of 2009. That does not mean that there won’t be rallies because there will most certainly be rallies and up weeks, possibly even up months, but after all is said and done the long term trend will remain down for the foreseeable future.

In the meantime there will be countless traders trying to predict the bottom and try to buy the bottom of the market and even look for market bounces and try to buy them. My point is, rather than fight the trend and guess why not just follow the trend and go short?

Using trend following, traders don’t need to guess or predict where the bottom of the market is but simply follow the trend. When the trend reverses the trend follower simply exits the trade and waits for the next trend to develop. Trend following is reactive, not predictive.

The fact remains that huge sums of money is and has already been lost by people in search of the bottom of the market. Just ask legendary investor Warren Buffett. Buffett attempted to call the bottom of the market months ago and was wrong in a big way, so far losing billions of dollars.

What is Buffett’s reason for buying the stock market? It seems that he has 2 main reasons:

1. He likes a bargain. He said a day or 2 ago that he likes to buy quality merchandise and knock down prices. Problem with this is that what may appear cheap today could very well be expensive tomorrow. As I have said before, there is no such thing as value in the markets as the markets are always right. Therefore, the current price on offer for any market is the right price at that particular moment in time.
2. He believes that you should be greedy when others are fearful and fearful when others are greedy. This is a popular theory and seems logical. The fact is that it is just not accurate enough as an indicator and Buffett’s experience in this example is proof positive of that.

The problem with both of these approaches is that they are both counter trend. Counter trend approaches when tested over market history show a negative expectancy as they are not statistically valid.

The question is then why does Buffett do this? Well, firstly there is an important distinction that Buffett is a long term investor, not a trader and he will therefore be taking a longer term view. He obviously also believed that when he was buying the market that we were either at or near the bottom. He was wrong.

In my opinion he is making a mistake because he has probably at best parked his money for a couple of years before it climbs above the levels that he bought at. Secondly, he is clearly very well capitalized and can afford to leave his money parked for a couple of years or so and even lose some money in the meantime until the markets recover. Other less well funded traders or investors cannot adopt the same approach.

As I have written in the previous article, the future cannot be predicted as it does not yet exist and there are way too many unknown variables, not least of which being crowd psychology and the emotions of greed and fear and therefore nobody knows either where the bottom of the market is or how long the recovery will take. If I had to give an opinion I would say that the stock markets will not make new highs for at least 5 years.

Yours for bigger winners, more often

Phil Seaton

www.PhilSeaton.co.uk  

PS. Instead of trying to predict the future, why not join the increasing number of trend followers who are making money from being short the stock markets and sign up for a 60 day trial of the LS Trader system

The questions that we at LS trader are asked most currently is where we think the stock markets are headed and where we think the bottom of the market is and what are the best spread betting strategies for today’s markets. This is a very common question these days and it seems to be on everybody’s lips these days.

My personal view is that nobody knows and regardless of what fundamental analysis or technical analysis you use, the bottom line is nobody knows. There are a huge number of very smart people who try to use all sorts of research and indicators to predict where markets are going but the fact remains that it just can’t be done consistently enough to make it a worthwhile approach.

Subscribers to LS Trader or regular readers of my blog will know that I don’t put any weight at all in fundamental analysis, nor do I think that many technical indicators have any value. Most of them when tested over historical data have no statistical validity and the reason for this is that they are predictive and are attempting to predict the future, which as of now does not exist.

Where does that leave us then? If we conclude that we can’t use technical analysis or fundamental analysis with any consistent accuracy, what do we do? Well, the fact remains that the only indicator of any value is the price. The price tells you everything about a market and represents the sum total knowledge of all market participants in that particular market. Therefore, all the different trading and spread betting strategies that are of any use will be based on and built around the price.

The price is the indicator used in trend following and quite simply, you use the price to identify trends in the markets. As of now, the trends in most markets are down, be it stocks or commodities. This is true of both the long and short term trends.

Therefore, rather than trying to predict of guess where the bottom of the market is, traders should just notice that the markets are trending down and position themselves accordingly.

At LS Trader, our spread betting system identified that the stock markets were trending down again several weeks ago and we have been short ever since. Therefore, all our current spread betting strategies for stocks will be from the short side only. How long will this downtrend last? We don’t know, nor do we need to. We just ride the trend until we get confirmation that the trend has ended at which point we exit.

Will we get out at the bottom? No, because trend following does not set profit targets and exit trades when or if such targets are hit and it does not try to predict the bottom of the market. It leaves the trades open until the market reverses a bit and then exits. This means that we must necessarily give back a portion of our profits but this is necessary to give the trend the maximum chance to continue and enable us to extract as much as possible from the trend.

For us here in the UK, the market that we seem to be fascinated with most is the FTSE 100. As I have written previously, this market was headed towards 3500 and that was an intermediate target that we had identified. This week 3500 was taken out and the market drifted lower, although it has been higher since. Will it go lower again? Who knows?

One thing that we can do to give us some sort of indication as to where we think the market may go is to identify key support and resistance levels on the chart. Looking at the FTSE, we can identify 3277.5 as the bottom set back on the 12^th March 2003. This was the level that the FTSE was at following the technology crash and this proved to be the bottom of that bear market.

If the market does fall again to test this level, one would expect major support and buying interest from bargain hunters. This level also represents a low set back in May 1995 and should represent major support. If this level fails then we may well see a swift decline further to around 3000. If this happens we will review things from there.

This is though as I have written above, all speculation as the future cannot be predicted and nobody can consistently call the bottom of the market except in hindsight and it’s equally possible that the lows set yesterday at 3464 (March contract) were the bottom of the market. Time will tell of course but the main point is don’t buy in to all these people trying to predict the bottom of the market because the fact remains nobody knows.

Good luck in your trading

Phil Seaton

PS. If you want a way to simplify your financial spread betting and avoid all the noise and hype in the markets you can sign up for a risk free trial of the LS Trader system here.