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 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.

LS Trader Financial Spread Betting Weekly Update

This week’s financial spread betting update is now available and can be read by clicking here.

This week we look at what is happening in the stock markets after the indexes broke out to new highs. We also look at the latest in the US dollar rally and what is happening in the forex markets.

This past week has seen new highs for the year for stocks but has also seen more short term weakness for the US dollar….continue reading by clicking here

Good trading

Phil Seaton

This month’s financial spread betting newsletter will be available soon. To receive it for free please click here to sign up for it.

The monthly newsletter is free and it covers the markets that we spread bet at LS Trader. We look at the markets as a whole and also look at each different market sector. We also have a market of the month and some comments on it including the chart for that market and look at what may happen next.

We also analyze some of the markets that are moving and look at the key levels to look out for from a perspective of possible targets as well as support and resistance levels. In addition we take a look at the major trends for each market sector and discuss the long term trend for the 3 main market sectors, which are stocks, forex and commodities.

In addition to the monthly newsletter, you will also receive our free weekly update which also covers the major sectors that we trade as well as the levels to keep an eye on in the week ahead. As an added bonus you will also receive 2 of our ebooks, free of charge. The first is “The 7 Rules of Successful Financial Spread betting” and the second is “The 7 Deadly Financial Spread Betting Mistakes”. Both of these ebooks will be yours for free as soon as you enter your name and email address at the bottom of the page.

Good trading

Phil Seaton

PS. To sign up for the LS Trader Financial Spread Betting Newsletter please click here

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

What the January S&P Barometer says about the stock markets this year.

The January Barometer states that as the S&P 500 goes in January, so does the rest of the year. This indicator has had only 5 significant errors in the past 58 years and has a 91.4% accuracy ratio over the same period!

The 5 times that this indicator was wrong coincided with some fairly major events.

1. In 2003, the anticipation of military action in Iraq

2. 2001 saw 2 interest rate cuts in January and of course September 11^th.

3. In 1982 we had the start of a major bull market

4. 1968 and 1966 were both affected by Vietnam

In January last year the S&P 500 was well down and we had a subsequent bear market, which we are still in. The current contract in the S&P 500 is the March contract and this opened the year at 902. It ended the month on Friday at 822, almost 9% lower for the month. This indicator suggests that the markets will also end 2009 down for the year as the bear market continues.

At the time of writing this, S&P 500 futures are further down at around 809. As I have written before, round numbers have a tendency to produce support, even it’s just from a psychological perspective, and therefore we may see some support at 800. This level is also quite visible on the chart as buyers have come in at around the 801 level several times recently.

If this level can be cleared then we may well see a move lower to around 750. Support should be seen at that level but we’ll have to review things if and when we get there.

As I have written many times before, everyone still seems focused on where they think the bottom of the market is and when they should buy. It’s quite amazing really that you rarely hear people say “the market is going down and I’m going to sell it short”. People seem to want to fight the tide instead of just go with it. This is of course why trend following works. You simply identify a trend in the markets and jump on board until the trend reverses.

As subscribers to my LS Trader financial spread betting system will know, we were short the stock markets for a big part of 2008 having first shorted the markets in January. We are again short some of the stock markets right now and will be for as long as the markets continue to trend lower. If you want to learn how to make money by shorting the stock markets you can subscribe to the LS Trader system here

There is an upward bias always in the stock markets as people buy in to the myth of buy and hold. This strategy is all well and good if you are in a multiyear bull market, but if you buy and hold through a multiyear bear market you will be in trouble. I believe this bear market has quite a way to run and I don’t see us having any buy signals in the stock markets in 2009.

All things considered it is unlikely that we will see much upside movement in stocks for the foreseeable future. There will most certainly be some bear market rallies along the way but I don’t see us having any buy indicators for stocks any time soon.

Good luck in your trading

Phil Seaton

PS. Click here to sign up for the LS Trader system. The system comes with a no quibble 60 day unconditional money back guarantee.

It’s now around 8.20am on a Monday morning and my financial spread betting for the week is already done! Now all I do is wait for the weekend and can go about my business. I don’t have to worry at all about what the markets do as I know that most of what goes on in the markets on a day to day basis is just noise. My stop losses are in place to protect my trading capital from any losses and also to take me out of my profitable trades if the market reverses.

How is this possible? Well, the financial spread betting system that I created, the LS Trader system, is a medium to long term trend following system which only takes around 15 minutes each week to follow. This means that all we do is open trades up on a Monday morning, add some stop losses and then move the stop losses on trades that we had open from previous weeks.

Sometimes we will get stopped out after a day or two if the market moves against us and other times we could be in trades for several months if some nice trends develop. Last year there were several markets that trended very well and we were in numerous trades for more than 100 trading days (assuming 5 trading days per week, that’s more than 5 months for a single trade!)

To use the LS Trader system, all you do is log in to your account at the LS Trader website (once you have signed up) and go to the trade bet calculator page. On this page there is a full list of all the markets we trade and details of all the trades we are currently in as well as all the trades we are opening this week.

You then go to your spread betting platform, such as IG Index and go to the market that you want to open, check the current market price, enter this figure in to the bet size calculator that we provide. You then enter how much money you have to trade with and the calculator tells you exactly how much to bet per point. It’s so simple. The software also shows you exactly where to put your stop loss.

All in all this is a very simple process which takes on average around 15 minutes per week. This week is a busy week as we have 9 new trades to open, so it actually took me a few minutes longer than normal.

To follow this financial spread betting system you don’t need to know anything about trading or the financial markets and you certainly don’t need to be reading newspapers or watching TV trying to figure out what’s going on in the markets. There are no charts that you have to read or data feeds that you have to subscribe to.

We’ve actually made trading the markets very simple even for the complete novice. And you can do it all from the comfort of your own home on your pc in just a few minutes per week. You don’t even need to phone a broker as you can execute all your trades instantly online. Best of all, as what we are doing is trading the markets via financial spread betting all our profits are tax free! Currently spread betting is tax free in the UK.

The bottom line is trend following works. It’s been around for several decades and has always and will always work. It takes all the guess work out of trading as it has simple specific rules to follow which lead to capturing big profitable moves in the markets.

There are numerous top traders who use trend following as their trading strategy to consistently beat the markets. Now, we’re making a very powerful version of this trend following strategy available to you and we’ve done all the work for you. All you have to do is simply copy our trades. How easy is that?

If this sounds like something of interest to you, and after all why would it not be as who does not want to “work” for around 15 minutes a week to produce a tax free income, then simply click here to visit the LS Trader website and sign up.

Good luck in your trading

Phil Seaton

PS. Click here to sign up for the LS Trader system. The system comes with a no quibble 30 day unconditional money back guarantee.