Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Here is part 6 of my rules of successful financial spread betting

6.   Ignore the news & fundamentals

Fundamental analysis is for the most part useless and very few traders can make money using this approach. Even if you could it would take you an inordinate amount of time studying reports, balance sheets, crop reports etc. This is not the way to trade. The same goes for following the news because usually the market has already discounted the news in the price. Many times you will hear very bullish news on a stock and then see it fall over the coming days.

It is also difficult to know what reports/news are actually true, and even if you know what is true how can you be sure that your interpretation of the news is correct? What about timing? Even if you have good reliable knowledge and a true interpretation of the news, how do you know when to act on it?

As strange as this may seem, there is no need to follow the news or study fundamental reports on any market that you trade. It is not even necessary for you to know why a market is going up or down, you only need to notice that it is. This is another advantage of trend following as a trading system in that not only is it highly profitable, but it can be done in less than an hour per week. The added bonus of this is that it is therefore far less stressful.

If something is happening in a certain market or in a certain stock, then before long this will start to be reflected in the price. If something good is happening in a stock or the supply and demand for a particular commodity is going out of balance and there is more demand than supply, then the price will start to rise.

Sooner or later a trend following system such as LS Trader will pick up on the price rise and issue a buy signal. The system will follow the trend and stay long until the market reverses at which point the system will exit with most of the profits from the move intact.

The same is true for markets that are struggling. In January 2008 there was a change of trend in the stock markets according to the trend definition rules that we use at LS Trader and the LS Trader system issued sell signals on the major stock indexes like the FTSE 100, Dow 30 and the S&P 500. The LS Trader system in fact gave a sell signal and went short on all 6 of the indexes that we trade before the end of January 2008.

Now, and this is the key point, the credit crunch was already around by then but few if any at that point knew the magnitude of bad news that was coming, but the stock markets had already turned south, essentially telegraphing a signal that we were on the verge of a decline. We, at LS Trader were short and stayed short for much of 2008 and caught a large part of the bear trend.

This just goes to show that sometimes trends develop ahead of the news and that by following trends you can actually get in ahead of the news to make a profit. It was not necessary to be following the news last year to be able to take advantage of the bear market, it was only necessary to observe that a new downtrend was beginning, enter the markets short and stay short until the trend reversed and started going up again.

Perhaps the most damaging aspect of fundamental analysis is that it does not afford any risk control. See my example of gold in the first of my trading rules (below) as it applies equally well here. As the price moves further away from your idea (assuming that you were using fundamental analysis and had reached a conclusion on market direction), i.e. you thought the market was a buy at $845 and it drops to $830, it must be an even better buy. The market then drops to $820 and looks like a better buy still and so it goes on. If you are trading correctly, you would just get out of the trade as you would know that you are wrong.

The LS Trader system will automatically get you in to the market when the conditions are optimal. It will also get you out of the market if things are not going for you with a minimal loss. Trading the LS Trader system, you will never have to take any big losses, but you will certainly get some big winners!

REMEMBER: ALWAYS IGNORE THE NEWS AND THE FUNDAMENTALS.

My seventh and final rule of successful financial spread betting will be published on this blog soon.

Good luck in your financial spread betting

Phil Seaton

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

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

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

5.    Always follow the trading system

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck in your spread betting

Phil Seaton

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

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Here is part 3 of my rules of successful financial spread betting

3. Cut losses

This is where most traders and trading systems fall down. You must cut your losses. 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. In some instances this style of trading will usually lead to you taking such a large loss that you cannot recover from it.

The key to consistent profit making in the markets is that your winning trades must be larger than your losers. If you keep your losses small and let your winners run this is easily achievable.

For example:

If you make 10 trades risking a £1000 per trade and the following happens

5 trades lose at £1000 per trade = -£5000
1 trade breaks even = £0
1 trade makes a £1000 profit = £1000
1 trade makes a £2000 profit = £2000
1 trade makes a £3000 profit = £3000
1 trade makes a £5000 profit = £5000

You have only been correct on 4 trades out of ten and you lost £5000 on your 5 losing trades, but you won £11000 on your 4 winning trades. You are £6000 in profit for ten trades. This shows you the value of cutting losses short and letting winners run. Most people want to be right all the time and look for a system that gives them 8 or 9 winners out of 10 (I have yet to see such a system!). I am not interested in being right, I am only interested in making money and you should be too.

If I were to offer you the chance to make £11000 out of every ten trades that you made and lose only £5000, meaning that you would be £6000 in profit every ten trades made I hope that you would jump at the chance to play this game all day long. This example is only hypothetical, but it gives you an idea of what this trading system is about. It is possible to be wrong 7 times out of 10 and still make money if you will follow the rules.

The above is just an example but over time, trading does work out usually somewhere along these lines. As an added advantage of trading this way, every so often you get a huge trade that pays out many more times your initial risk. Usually each year we get a handful of outsized winners which we class as home runs.

In the example above I have only included 1 trade winning at 5 times the original trade. In 2008 we had several trades that paid off at 9 or 10 times the original stake and one that we recently exited, the short GBP/JPY trade that paid out around 22 times the original stake.

One concept that must always be kept in mind is the risk of ruin. Many traders overtrade both in frequency of trades and size of trades. They stake far too much on each trade and therefore end up taking big losses. This approach often leads to traders wiping out and losing all their account equity.

The right approach is to risk only a small percentage of your trading capital on each trade and set an initial stop loss and stick to it, never moving your stop loss back to stay in the trade. This way you will ensure that you stay in the game and make sure that you have the chance to catch some big winners and make profits.

If you have a good trading system which has a positive expectancy, then the key point is to stay in the game long enough for this positive edge to work in your favour. If you lose all your chips you can’t play. Therefore you must be conservative, both with your risk per trade and your account equity on the whole.

REMEMBER ALWAYS: CUT YOUR LOSSES SHORT AND LET YOUR WINNERS RUN

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

Good luck in your financial 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 around 15 minutes per week.

Welcome to my new financial spread betting blog .This blog is all about financial spread betting and the spread betting strategies and beliefs that I have discovered over the past decade or so that lead to financial success in the markets.

There are many different styles, methods and systems that traders use in spread betting the markets and my aim on this site is to explain the benefits and pitfalls of many of these methods. There is so much conflicting information and what I would call misinformation in the marketplace on what is required to be a successful trader so my aim is to help you navigate this path successfully and avoid any unnecessary and unprofitable detours!

Over the weeks and months ahead I will post my thoughts on the financial markets and what I think may be on the horizon. It is important at this point to state my belief that the future cannot be predicted as there are simply too many variables and unknowns and the fact that as of now the future does not exist, but by looking at market trends in the markets and certain support and resistance points on the charts, a trader can get a good idea of what may be ahead.

Over the years I have read a vast amount of books that are available on the markets and have specifically made a point of studying successful traders and in doing so look for common denominators that enable these superior trades to step ahead of the crowd and achieve consistent returns in the markets.

Backed with all this information I have vigorously researched and tested virtually every trading system and or indicator and have found what is reliable and what is bogus. I have coded hundreds of different systems and rules and run literally hundreds of thousands of backtests over a long period of market data.

My aim when I started this was to approach the markets with a blank canvas and not take anything on hearsay, but to test it out and find out through experience what works and what does not work. This has enabled me to create an extremely powerful spread betting system which I myself have traded for several years.

I hope you enjoy and benefit from my articles on this blog site and please feel free to leave any comments or ask any questions.

Good luck in your trading

Phil Seaton

PS. Find out more about my financial spread betting system and spread betting strategies here