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

Mistake #7 Listening to the news and fundamental analysis

Essentially there are two main trading styles, one is fundamental trading and the other is technical trading. Unless you are a full time trader and can devote your life to studying the markets constantly, fundamental analysis is not the way to go. Unless you are George Soros who has a lifetime of experience behind him and an excellent understanding of fundamentals you will almost certainly be a losing trader by trading fundamentals.

Even full time traders and fund managers who devote their lives to analysing the fundamental aspects of the markets and hire a large staff to do research for them still get it wrong most of the time. That’s one of the reasons why most fund returns are so poor.

The reason why fundamental analysis is so ineffective and very few traders can make money from this approach is that there are so many variables. For example, when you hear a particular news item or hear very good results from a certain company, many times the price will go down. This is puzzling to most people but the reason is that the markets are always looking ahead and have already discounted the news in most cases.

Another problem with fundamental analysis is that it is also difficult to know what reports or news items 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?

Perhaps the most damaging aspect of fundamental analysis is that it does not afford any risk control. If you think a certain market is going to go up but instead it starts to go down, as the price moves further away from your idea, or the point at which you though it was a buy, it must be an even better buy. The market then drops further and looks like a better buy still and so it goes on. Before you know it you have a very large losing position on your hands.

Essentially, if you use the fundamental trading style and are convinced of your research, the more a trade goes against you the better it looks so you end up buying more and getting into real trouble.

You hear about cases like this all the time, and often hear comments from fund managers like “We were convinced of our analysis and that the market was a buy. We bought it all the way down”. If you had been trading correctly, you would just get out of the trade whilst your loss was small. If you are holding a losing trade after 2-3 weeks you are clearly wrong and should be looking to exit the trade.

I have found in my own trading that even if you are not trading on fundamentals but are using a technical trading approach you can be negatively influenced by the news without wanting to be. For this reason I believe that many people are better off avoiding the news altogether.

For example, let’s say that your trading system has generated a buy signal on a particular market but you have heard a rumour or news item that may affect the market you want to buy, you decide it is prudent to hold off from taking the signal and wait. It turns out that the market ended up going up exactly as your system had indicated, but you missed the move through doubting your system.

Now you are reluctant to take the trade as it has moved from where you wanted to buy it and decide to wait until the market comes back to the price that you were originally going to buy at. The market never comes back to that level and becomes one of the great trades of the year. You missed it all because of some news item. Had you not followed the news you would not have overruled your trading system and would now be sitting on a profitable trade.

Of course this could work the other way around and keep you from taking a losing trade. The fact is that it is important to have a trading system and to follow it consistently, regardless of what items you hear in the news or read in the papers. Your profits at the end of the year will come from following your system consistently throughout the year and not from listening to news items.

There is however a positive use for the news which can be useful some of the time and that is using news as a contra indicator. For example, if good news comes out on a particular market and that market goes down then you may want to think about liquidating a long trade or if you are out of a market possibly going short.

Another use for news items is magazine front covers. These are often excellent contra indicators and can be very useful for picking market turning points and can be used to fade (go opposite) to the news. For example, say that we get a headline on a major magazine that runs something like “Cheap oil forever”, that’s likely to be a sign that the oil markets are either at the bottom or near the bottom of the market.

How can this be? Essentially there are 3 types of market participants:

1. The investor. Always in early and happy to wait for returns on their investments
2. The trader. Never in or out first but catches the meat of the move in the middle
3. The public. Nearly always wrong and last in on major moves and also last out.

The cycle tends to go from investor buying at the lows but selling a bit before the top to the public. The public gets in usually at or near the top of the market. Because the investor and the trader are already in the market, the public has nobody to sell to and so as there are no more buyers, the price falls.

When a market reaches the stage of hitting the front covers we are usually at the stage where all of the public are in the market already, so this is a good indicator that the market may be due to reverse. To continue our cycle, the trader usually gives back some profits and sells on the way down. The trader when convinced the market is now in a downtrend sells the market short and profits from the down move.

The public hold on right to the bottom and when they can’t stand it anymore they then sell back at the bottom to the investor and so the cycle begins again. This is another reason why such a high percentage of people lose money (especially the public) in the stock markets. The solution is to identify and follow trends.

A good trading system such as the LS Trader financial spread betting 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. You do not need to know the reasons why a market is moving up (or down) only that it is and then jump on board. This is the way to make consistent profits trading the financial markets.

I hope you have enjoyed reading this 7 part series that I call “The 7 deadly financial spread betting mistakes”.

Good luck in your trading

Phil Seaton

PS. If you are not already subscribed to The LS Trader system please click here to start your 30 day trial. The system has been built around all the points covered in this article and avoids all the mistakes that most users of financial spread betting make. The system comes with a full 30 day money back guarantee.

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

Mistake #5 Taking too much risk

Most online traders take too much risk when trading. This is especially the case for people trading online with financial spread betting.

In futures trading, traders decide how many contracts to buy of each instrument, but in financial spread betting, traders only have to decide how much to bet per point. This makes it much easier to over trade and to risk too much on each trade.

It is also much easier now to trade too frequently, with the temptation to sit in front of the screen all day. It is no longer necessary to pick up the phone to execute your trades as you can access your financial spread betting account 24 hours a day and can trade with ease at the press of a button. This can very easily lead to over trading and taking too much risk.

To get around this it is necessary to have a specific system to follow with specific rules which will govern each of the following:

1.      The markets (instruments) in your portfolio.

The selection of markets (instruments) in your portfolio is a crucial factor. It is important to select actively traded markets so that you can exit your trade when you want to. If liquidity in a certain market is low this can prove difficult and expensive as you may get a far worse price than you had expected when you go to exit your trade.

2.      How many markets in your portfolio you will trade at any given time

The number of trades that you will have open at any one time determines the total amount of risk that you have. There must be a point at which you do not open any new trades until some prior trades have been exited, or the stop loss in some trades has moved up to the entry level.

3.      How much exposure you will have on open trades at any one time

This follows on from point 2. If you are going to risk 2% per trade then 50 trades open at one time would mean that 100% of your account is exposed. This would be an extremely dangerous game to play and the volatility in your account would be extremely high.

If you are only prepared to risk 50% of your account then you can only have 25 trades open at any one time. Obviously as certain trades progress you can move your stops up to break even and then eventually to lock in profit. At this point you could have more trades open but not so much risk exposure.

4.      Your bet size for each individual instrument.

Most people who use financial spread betting bet far too much per point. The correct approach is to decide where you will set your initial stops, assign an amount of risk per trade which should be the same for all trades and then subtract your exit price from your entry price. You would then divide the number of points that your stop is away from the entry price by your risk per trade which would give you your bet size per point.

5.      The distance your initial stop loss is from your entry price

Most online traders put their initial stops too close to the market and bet too much per point. The correct approach is to use a wider stop and a smaller bet size. Stops which are too close to the market invariably get hit, causing you to get taken out of a trade prematurely. At the same time you don’t want your stops too far away as this will cause you to trade with a reduced size which will limit your potential profit.

6.      How you will manage your trade once it is open and when you will exit the trade.

You must have a set point at which you will exit your trade. A good trading system will have specific rules for this and your stop should follow up behind the current price as the trade progresses. Initially moving stops up behind a trade as the trend progresses will enable you to limit your exposure on that particular market and ultimately to lock in profit whilst still allowing the trade to progress.

7.      The correlation between each instrument.

Many markets are correlated. Some are highly correlated such as Crude Oil and No Lead Gasoline; others are slightly less correlated, like Soybeans and Wheat. Others have little or no real correlation at all.

If you trade too many markets that are highly correlated you are trading the equivalent of one trade but with much more risk as you have multiple trades. A dramatic move in these markets is likely to cause a severe drop in equity in your account.

8.      The maximum drawdown in equity that the system will generate

A drawdown in equity is the distance of the highest point of equity to the lowest point. A good trading system will have a high profit return with the smallest possible drawdowns.

The maximum drawdown that the system has should be within the comfort zone of the trader. Some traders are able to withstand high volatility in their account and larger drawdowns and are subsequently able to capitalize on market moves. Other traders are more risk averse and have to reduce either the number of instruments that they trade or the risk per trade (bet size).

9.      The duration of the drawdowns

The duration of the drawdown is how long it takes in trading days to return to new equity highs from the lowest point. A good trading system will recover in a relatively short period of time.

10.  The frequency of the drawdowns

The frequency of drawdowns a system has is also a factor. If you trade a system which has frequent drawdowns in equity of 50%+ you fill find it extremely difficult to follow the system over a long period of time, increasing the likelihood that you will abandon the system. Chopping and changing systems will ensure that consistent profits will elude you.

The LS Trader system takes all of the above factors into account and is a robust trading system, which has been optimized in all of the above factors, culminating in a system which has high returns whilst also keeping drawdowns to a minimum. There are specific rules to cover all of these areas meaning that the trader will always know exactly what to do in any eventuality.

In the next part which will be published in the next few days we will discuss Deadly Financial Spread Betting Mistake #6 which is titled “Day Trading and what all day traders should know”.

Until then, good luck in your trading.

Phil Seaton

PS. If you are not already subscribed to the LS Trader system, please click here to start your 30 day trial. The Ls Trader system has been built around all the points covered in this article and avoids all the mistakes that most users of financial spread betting make.

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

Mistake #4 Averaging down (adding to losing trades)

This is one of the biggest mistakes that financial traders make and it is the downfall of many traders and trading systems. Many traders think it’s a good idea to add to a losing trade as they think that if they take a second position they are averaging down their price. In rare cases this might actually work, but in most cases it will go against you and in fact creates a snowballing effect, whereas now instead of having a single small loss, you now have 2 losses.

Now you can find yourself getting into real trouble by opening a third and a fourth unit. Before long you have a huge position open which is way out of balance for your account and much too risky. These trades often go wrong and when they do they wipe out all of your trading capital. The only real effect of adding to losing trades is an increase in risk.

The right thing to do when a market goes against you is to just get out of the trade when it is clear that you are wrong. A good trading system should have specific rules for defining when to exit a trade if it goes against you. This leads to taking the occasional small loss, but is not emotionally or financially damaging and leaves your trading capital intact for when the market is right and sets you up nicely to take advantage of the next big move in the market.

To be clear, a unit is the position size that you have open. In futures trading this would be the number of contracts that you opened on your original position. In financial spread betting a unit would be the bet size per point that you had opened on your original trade.

For example, let’s say that you are using financial spread betting and that you have opened a trade at £5 per point. Adding a unit would mean that you opened a second position in the same direction (either long or short) for another £5, meaning that you would be either net long (or short) £10 per point. Each additional unit would then be another £5 per point, so you can see how you can quickly build up a large position with a lot of exposure.

Most traders take too much risk in the first place and then compound that mistake by adding more and more trades as the trade goes against them. This is why you hear some horror stories about amateur traders dabbling in the markets and losing their shirts. Adding to losing trades is fatal to your long term profitability as a trader.

Not quite as bad but also very destabilizing to your profitability as a trader is adding to winning traders. Many so called trading gurus will tell you that you should add units to winning trades. I believe that this is also a mistake and is poor advice and here’s why…

In my earlier days as a trader I used to add to trades that went in my favour. This is all well and good when things are going well, but what I found would happen was that I would pyramid up my position and get up to about 4 units on a trade, only for the market to reverse and cause me to take a large loss. This can be very frustrating, especially as oftentimes if you had just left your single trade on and had not moved your stops up behind the market as you added on units, you would still have been in your original trade without your stops being hit.

One of the major drawbacks with adding on multiple units is that you either leave a very wide stop loss, or you move your stops up behind the market. Moving stops up behind the market can often cause you to get stopped out of the trade on a small reversal, even though the trend is still in process.

After extensive back testing over a 25 year market history database, I proved to myself that adding units on to trades is a mistake, whether you are adding units to a losing trade or a winning trade. Adding units to losing trades inevitably causes your account to eventually go to zero, as sooner or later you will end up taking a huge loss. While the effects of adding units to winning trades are not quite so damaging, I found in every test I made that the profitability of the trading system actually went down, while the risk profile increased.

The LS Trader system takes all this into account and only trades single units. The LS Trader System does not add to losing or winning trades, therefore keeping the system stable without too much exposure to risk. Even with just one single unit per trade, the LS Trader system is extremely profitable.

In essence, a trading system that adds units is less stable, prone to larger and more frequent drawdowns and has a higher risk exposure. This is not the way to trade successfully. Stick with a single unit. If the trade goes against you then you should exit with a small loss and live to fight another day. If the trade goes in your favour, then hold it for the duration of the trade. You will still make more than enough profit from the occasional big winning trade to pay for all your losses and still leave enough over to make a handsome profit.

This leads us nicely on to Deadly Online Trading Mistake #5 which is titled “Taking too much risk”. This will be published here in the next few days.

Until then, good luck in your trading.

Phil Seaton

PS. You can start a 30 day trial to the LS Trader financial spread betting system by clicking here

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

Mistake # 3 Trading against the trend

You should never trade against the trend but 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. 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.

Conversely, if the price is going down then there is a reason for that as well. Why would we want to get on the wrong side of the prevailing trend? Traders want to be right and they want to say “I got in right at the bottom, look how smart I am”, not realising that those bottom few points that traders try to pick are the most expensive few points in history.

If you think about it, how likely is it that you are able to pick a point near a reversal in price and that the price is just going to stop and then start moving the other way? It’s not really very likely. Far more likely is that the price will continue to move in the same direction that it is already going.

The example I like to use is that counter trend trading is like jumping in front of a fast moving train and hoping that it stops right in front of you, turns around and then starts going in the opposite direction. Why not just jump on the train in the direction it’s already going and stay on board for the duration of the journey (the trend) and then get off the train (exit the trade) when the train finally reaches its destination and starts to turn back?

This is the optimum approach and affords easy risk control, because it will soon become obvious if the trend is not going to continue and you can then exit the trade with a small loss, leaving your trading capital intact and you ready to take the next good trading opportunity that comes along.

If you are counter trend trading and are looking for the top or bottom of the market and you decide for example that Gold has dropped to $850 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 $850 only for it to fall to $830. If it was a good buy at $850 it must be an even better buy at $850, so you decide to open a new trade at $830 (after all this is giving you an average price of $840 which must be good!). This process is known as averaging down. We’ll talk about this in part 4 of The 7 Deadly Financial Spread Betting Mistakes.

Meanwhile, 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 the cause of most 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.

The fact remains that if you were trend following, i.e. trading in the direction of the trend then you would not have been in this position in the first place as you would have exited your trade shortly after it moved against you, taking a small loss. You would also not have averaged down (added extra trades to your original position), as this would be taking trades against the trend. Therefore you would have just taken 1 small loss, instead of several large losses, and lived to fight another day.

A very popular trading theory is buying on dips and selling rallies. This is counter trend and is a mistake. Testing this theory out over a long period of data proves that this is a losing strategy. The reason for this is that if the market falls and you are looking to buy on a dip, how do you know that this is not the start of a trend reversal? You could buy on the dip only for the market to continue to go against you. The same is true for selling rallies.

The rule here is that you must trade with the trend and therefore you must buy strength and sell weakness. Therefore you should never buy on dips or sell rallies but should wait for the momentum of the market to go your way before entering. Counter trend trading is going against the market and is best avoided.

Longevity in trading is the key as long as you have a system that has a positive expectancy, or an edge. The LS Trader system is such a trading system as it has a positive expectancy and therefore an edge. The longer you stay in the game, the more chance that edge has of coming to the fore. This leads to long term profits, which is what all traders are after.

Part 4 of the 7 deadly financial spread betting mistakes will be published here in the next few days.

Good trading

Phil Seaton

PS. If you are not already subscribed to The LS Trader system, please click here for a 30 day trial subscription. The LS trader system has been built around all the points covered in this article and avoids all the mistakes that most online traders make. You can try the system out for a full 30 days and if you are not delighted with it, simply cancel and receive a full refund of your subscription.

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 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.

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