Today we’re going to look at the importance of having and following a spread betting system in order to ensure that we catch the big winning trades. We’re going to look at a real world example to illustrate the importance on this and how not following a system negatively affected one of the world’s top traders. In our last post on Stanley Druckenmiller, we commented that Druckenmiller had decided to close his hedge fund due his inability to make outsized returns over the past 3 years which he put down to very unfavourable market conditions.

One of the factors that have negatively impacted his performance this year is that, by his own admission, he missed the move in treasuries. Since treasuries have been the biggest and best trending markets this year that has been a fatal mistake. This does highlight a very important lesson for traders and that is that you must have a trading system, or in our case a spread betting system with specific trading rules and the discipline to follow it consistently.

A good spread betting system should include each of the following:

• Which markets to trade
• When to enter a trade
• When to exit a trade
• How much to stake on each trade
• How to know when to stay out of a market

Once you have a spread betting system that incorporates the above rules, all you have to do is follow it consistently. My guess is that either Druckenmiller was relying on discretionary reasons for entering trades rather than specific rules, or his system indicated an entry but he chose to skip the trades because he did not like them for some reason.

This is in fact where many traders fall down and the mistake can be fatal, as seen by the negative impact that skipping these trades has had not just on Druckenmiller’s performance, but on him emotionally as well and these factors may have led to him calling it a day.

In reality, nobody can be sure when entering a trade whether it will be successful or not and this is why once you have a spread betting system it is important that it is followed consistently. One can never tell in advance when the big moves are going to come and if you skip a trade for any reason and it goes on to be a big trend and a big winner you are in trouble.

One of the underlying principles of successful trading is that it is always better to risk taking a small loss than it is to risk missing a big winning trade. If the spread betting system used is good then only a small percentage of trading capital should be used for each trade, for example 2%.

If one is only risking 2% equity per trade then taking a loss of that amount is not too painful. Conversely, if a trader misses a trade that goes on to be for example a 10 to 1 winner, as may be the case in the current treasury trades then that equates to 10 x 2% of missed opportunity. That is far worse than risking the initial 2% loss. It is compounded if there are a handful of correlated markets such as in the case of treasuries, the 5 year note, 10 year note and 30 year T bond. Missing out on one trade is bad but missing out on all three is fatal. That is why we say it is always better to risk a small loss than it is to risk missing a big winning trade.

Because the markets only trend around 40% of the time all trend following systems will have more losing trades than winning trades. Therefore to make money you must have the big winning trades and ensure that you catch them when they come. If you don’t, you have no way to pay for the losing trades. This is why you must have specific rules to enter trades and rules to ensure that you don’t miss any trades.

Our spread betting systems, whether it is our forex system or our primary financial spread betting system for multiple market sectors both include rules to ensure that big trends are not missed and that trades are allowed to run to extract the maximum profit potential of each move. So, the question to ask yourself is “am I using a good system and do I have the discipline to follow it consistently?”. If you can answer yes to both then you are on the road to trading success.

Until next time, good trading

Phil Seaton

PS. You can find out more about our financial spread betting systems by clicking here.

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.

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

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

6.   Ignore the news & fundamentals

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

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

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

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

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

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

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

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

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

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

REMEMBER: ALWAYS IGNORE THE NEWS AND THE FUNDAMENTALS.

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

Good luck in your financial spread betting

Phil Seaton

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

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

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

5.    Always follow the trading system

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck in your spread betting

Phil Seaton

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

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Here is part 4 of my rules of successful financial spread betting

4.    Money management.

Money management is the continuation of the 2 previous rules. This rule regulates how much you are prepared to risk per trade when you open a trade. This means you know exactly how much you stand to lose should the worst happen and the trade go against you (although in some rare instances a market may gap through your stop forcing you to take a larger loss than you had planned for. Fortunately this does not happen very often, especially if you stick to trading highly liquid markets as I recommend.)

Most traders make the mistake of risking too much capital per trade. They then end up taking much larger losses than they needed to and when a profitable trade comes along, they have either missed it altogether due to lack of capital, or only placed too small a bet on the trade and did not make enough profit from it to pay for the losing trades.

I always believe that you should risk enough on each trade so that when you have a winning trade it is worthwhile but at the same time you are able to sleep at night. The aim is a balance between being profitable and being overly adventurous.

When we enter a trade we never know if it will be a winning trade or a losing trade, which is why we always stake the same percentage of our equity on each trade. It’s for this reason that it’s very important that you always risk the same percentage of equity per trade. Also, having a specific rule of account equity to stake will help prevent you from overtrading.

It is a good idea to calculate your account equity each time you open a trade. If you are using the LS Trader system, which is a weekly system, then you would calculate your account balance at the weekend and use that amount for every trade you enter for the forthcoming week. You would then recalculate your equity again the following weekend and so on.

The reason for this is that when the markets are trending well and we are making money, we can afford a slightly larger stake as we want to take advantage of the markets going in our favour.

Conversely, if we are in a bad spell and the markets are not trending well, then we will be using smaller bets through this period. This keeps your trading capital safe for when the markets start trending well again. This is an extension of the cutting losses and letting our winners run, but instead of applying this to each trade, we apply it to our overall account balance as well.

Following this rule makes us more profitable at the end of the year as we will be using larger bets when things are going well and smaller bets when things are going against us. As I have written before, the markets only trend around 40% of the time, so using this rule will help us to cut back our risk and exposure when the markets are not trending but enable us to be a little bit more aggressive when the markets are trending.

Example:

Let’s say that at the weekend your account equity is £25,000 and you are therefore risking 2% per trade, you calculate 2% of £25,000 which equals £500. You stake £500 as your maximum loss for every trade you enter that week. Come the following weekend, you have had a good week and your account equity has gone up to £29,000, you then take 2% of £29,000 = £580. You then risk £580 on every new trade for the week ahead.

When you have a trading system that has a positive expectancy, like the LS Trader system, the most important thing is to make sure that you stay in the game. By doing this you ensure that you give the system time for the positive expectancy to come to the fore and for you to make money.

You must always remember that if you lose all your chips you can’t play, so you must keep in mind the risk that you are taking, not just on individual trades, but on all your trades combined. A good trading system will have specific rules to take all of this into account when deciding which trades to take.

ALWAYS REMEMBER TO APPLY MONEY MANAGEMENT. IT’S VITALLY IMPORTANT TO YOUR SPREAD BETTING SUCCESS.

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

Good luck in your trading

Phil Seaton

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

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Here is part 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.

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

Here is part 2 of my rules of successful financial spread betting

2. Let Winners Run

When trading the markets, we never exit a trade at the top because there is no way of knowing where the top is in advance. You can only ever tell where the top was in a market after the event. Many times a trade will get so high and you will think it cannot go any higher only for it to continue on and on and on. Sometimes markets go on such long trends that it defies reason. A trend can go on for months or even years.

We don’t even need to know the reason for the trend, only that it is in progress and we want to stay on board until the trend comes to an end. Long trends are usually formed when the supply and demand balance goes out of whack. Markets can also trend for long periods based on greed and fear. Market participants see a market rising and their greed causes them to keep buying the market, or they buy through fear of missing out.

The same is of course true with short trades where a market price gets so low that you think it cannot go any lower. Obviously, commodities are never going to go to zero but stocks can. Commodities can though go to very low prices, especially when they are out of favour. Recently we have seen a collapse in the commodity markets with some markets dropping around 75% in the space of a few months.

If we got out where we thought the top or bottom was then we could be leaving a large chunk of profit still on the table. If somebody tells you that they know where the top of the market is (or the bottom) I advise you to ignore them. The future cannot be predicted because as yet it does not exist. The best policy is to let your trades run and exit when the trend reverses.

The only way to consistently make money in the markets is for your winning trades to be larger than your losing trades. To do that you have to let your winning trades run so that you can extract the maximum profit out of each market. Occasionally this will result in some hugely profitable trades and that at the end of the day is what we’re after.

In trading you will at the very best end up with a 50% win rate and even this is being generous. After all, even lungs lose air around 50% of the time! Even if you apply the 50% win rate to your trading, your winners would have to be larger than your losers otherwise you could not possibly come out in front. In reality, traders are probably right closer to 40% of the time or possibly even less. This makes it even more important that you allow your winners to run.

If you never let a winning trade run you can never get big winners, as you will have taken your profits too quickly. There is a saying that you never go broke taking a profit. This is a fallacy. I say that taking profits prematurely is the way to go broke as you will have no way of paying for the losing trades without big wins!

Traders often fear that they will give back a percentage of their profits on a trade if they let their profits run. Sometimes it is necessary to give back a percentage or even all of your profits on a trade. You may even have a winning trade turn in to a loser and this does happen if you are following a trend following system correctly.

Many people talk about not letting winning trades turn in to losing trades and that once they go in to profit they move their stops up to break even. This is again a fallacy as doing this can cause you to exit a trade prematurely on a slight reversal. I never understood why people think that getting out even is so important anyway. It can only be from the perspective of not wanting to be wrong.

A trader must be willing to be wrong more often that he is right, but is able to be profitable trading in this way by allowing his winning trades to grow, so that they are larger than the losing trades. In this way, a trader can be wrong 7 times out of 10 trades but still end up ahead.

This is trend following in a nutshell. Identify a trend, jump on board and ride the trend. If the market reverses after you have entered simply exit when the market hits your initial stops. If the market goes on and trends, let your trade run and bring in some big winning trades. If you do this consistently you are stacking the odds in your favour that over time you will come out in front.

It is of paramount importance to the long term profitability of a trading system that we have the occasional huge win. This is only possible if you let your winners run. If you are in the habit of taking your profits when they are still small for fear of giving them back then you will never have any big winners as a small profit needs time to grow into a big profit. Remember, one huge win pays for a lot of small losses.

REMEMBER ALWAYS: LET YOUR WINNERS RUN.

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

Good luck in your financial spread betting

Phil Seaton

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

Phil Seaton’s 7 Rules of Successful Financial Spread Betting

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

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

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

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

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

1.    Trade with the trend.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck in your trading

Phil Seaton

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