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.

Last week legendary hedge fund manager Stanley Druckenmiller announced his retirement from the investment world and stated that he was going to close down his Duquesne hedge fund. Druckenmiller was part of the team (along with George Soros) that broke the Bank of England in 1992 when they bet that the British Pound would fall against the Deutschmark and racked up profits on the day of around $1 billion. Druckenmiller cites his reason for retirement as his inability to make out-sized returns over the past 3 years due to very unfavourable market conditions.

Now, I don’t know what his issue was in 2008 as our spread betting system had a record-breaking year and there were a lot of very good trending markets across many different market sectors and this enabled our trading system to have its best year on record. 2009 and 2010 I can understand though as market conditions have been tough for everyone due to excessive volatility and global uncertainty.

The question is, what does this say about the future of hedge funds and the future of trend following? Whilst many believe that this is a bad sign if someone of the knowledge and experience of Druckenmiller has struggled to make money I actually take the opposite view. My belief is that Druckenmiller quitting is actually a great sign for future performance of hedge funds and especially trend following systems and funds and my reasoning is as follows:

All trading systems regardless of what they are based on will go through periods of good performance and periods of lesser performance. This is down to the nature of the markets and the fact that no strategy can be effective in all market conditions. Trend following systems will suffer during periods of excessive volatility and non-trending markets because they rely on good trends to make profits.

What we have seen in our own research and this is also quite well known amongst experienced traders and fund managers is that investors, especially amateur investors generally tend to bail out at the worst point, usually near the bottom of the equity curve. This is usually due to a period of poor performance exceeding their threshold for what they can handle.

At a higher level, the fund manager, also feeling under pressure from his investors and due to the need of better performance also seeks to change his strategy after a prolonged period of under-performance. Once the pain reaches a certain level amongst investors and fund managers, Druckenmiller quitting is evidence that we are at or very near that point we will then likely see mass withdrawals from hedge funds.  This will mean that moving forward not everyone is chasing the same moves and many will then use different or even opposing trading strategies. This will very likely free the markets up again and return them to a strong trending phase.

When someone of the calibre of Stanley Druckenmiller calls time on his trading due to how tough he is finding market conditions, that to me telegraphs the fact that we may be near the bottom of the equity curve and that it is in fact a great time not to quit, but to begin.

The markets essentially do one of two things, they either move directionally, i.e. trend or they move sideways, i.e. consolidate. In our trading research we have seen without doubt that following a prolonged period of one, a good period of the other follows. This is in fact quite logical and can be seen in many different markets. In 2008 for example, there were many out-sized trends in many market sectors and what has followed since has been a brutal period of consolidation.

It has always been my belief, based on my own research, that following a brutal consolidation phase, the likes of which have not previously been seen to the extent that are currently seeing, that an excellent period of trending markets will follow. These large trends could be either up or down. Trend following systems don’t care whether they are buying or selling, they can make money in up or down markets.

Now, whilst it would be foolish to say that Druckenmiller’s inadvertent timing is perfect as a contra-indicator, I wonder if around a year or so down the line we can look back and say that Druckenmiller actually came out near the bottom of the performance curve. My bet is that he won’t be far off and the next few months will tell the tale. I also would not mind betting that he makes a return to the markets himself at some stage in the future.

Until next time, good trading

Phil Seaton

PS. You can find out more about our trend following financial spread betting systems and spread betting strategies by clicking here. Our system comes with a full 30 day money back guarantee.

This week’s financial spread betting update is now available and can be read by clicking here. This week we continue our focus on spread betting strategies for gold and the S&P 500 as well as looking at other markets of interest.

Last week we wrote that both gold and the S&P 500 could be setting up for decent moves and that they would be worth watching in the week ahead. Both markets did go on to make decent moves, gold broke out of the trading range that it had been in, clearing resistance in the process and the S&P 500 also made a break to the downside.

Commodity markets were mixed on the whole with decent moves to the up side in the soft commodity markets, especially Coffee and Sugar as well as gains for the cattle markets. Energy markets did not fare so well, with a new move to the downside for Crude oil, following the weakness that had been seen in heating oil and no leaded gasoline the week prior.

Currency markets were also interesting, with the Euro resuming the long term downtrend and a general move away from the riskier currencies towards the haven currencies, Swiss Franc, Japanese Yen and US dollar.

So far this morning the markets have been fairly quite with a mild continuation of the trends from last week. The week ahead could be an interesting one and the stock markets may be building up for a big move.

This week’s financial spread betting update begins with:

Stocks moved further to the downside, reaching 4 week lows in the process having failed once again to clear short term resistance. The US Dollar continued its recent rise against most of the major currencies, whilst commodity markets were mixed..….continue reading by clicking here

Good trading

Phil Seaton

PS. You can sign up for a risk free trial of our proprietary financial spread betting system by clicking here. The system comes with a 30 day no questions asked money back guarantee and covers our spread betting strategies for each of the stock, commodity and forex markets discussed above.

Today we are going to focus on some spread betting strategies using the 200 day moving average  and we will use the S&P 500 for our example.

The first thing to do on any market is to determine the direction of the long term trend for the market that you are looking to trade. Once you know this, you then select your spread betting strategies in the direction of the long term trend only and ignore signals in the opposite direction.

The reason for doing this is that counter trend moves have a much higher probability of not developing in to a good trend and moves against the trend are generally shorter in duration. In this case we are looking at the S&P 500, which is currently in a long term downtrend.

Each trader will have their own ways of determining the trend and this can be based on moving averages or any one of a number of indicators. One of the most popular indicators for determining this is simple moving averages. The most common time period for longer term trend analysis is the 200 day moving average. If the market is above the 200 day moving average, then the market would be in an uptrend and if below then it is in a downtrend.

I have developed my own proprietary indicators for determining the long term trend and each trader can do their own research to see which indicators and time periods they prefer. The 200 day moving average is widely used and is a good place to start, especially as many traders look at it.

On the S&P 500 September contract, the 200 day moving average is currently sitting at 1107, so as the market on Friday closed at 1070.3 this is below the 200 day moving average and the trend is down. Therefore, for the best chance of success, use only spread betting strategies from the short side.

In our last post on spread betting strategies for the S&P 500, in addition to observing the long term trend we also pointed out that the market was struggling with resistance from the 200 day moving average and the 1100 level. Since then the market had another go up towards the 1100 level and failed, moving back towards the support area at 1165 and even moving below that briefly.

Therefore, the short and long term trends are down so the odds favour lower prices in this market for now. Friday’s close at 1070.3 was a new low close for 4 weeks and this indicates short term weakness. For the short term, Friday’s lows of 1061.8 may provide support but if support here fails then we may see a move lower towards the 1000 level.

Until next time, good trading

Phil Seaton

PS. You can find out more about our financial spread betting systems and spread betting strategies by clicking here. Our system comes with a full 30 day money back guarantee.

In our last post of spread betting strategies for Gold, posted Friday morning, we wrote that Gold was in a trading range between $1200 and $1175. Later on that day Gold actually pierced $1200 resistance intra day but was unable to stay above that level and proceeded lower.

On Monday the market was lower again and yesterday we got a downside breakout through support at $1175 (August contract). IG Index is now quoting Gold on the December contract so we now shift our focus to December’s contract. There is actually only $3.80 difference between the 2 contracts, with last night’s close on August at $1158 and December’s at $1161.8

Looking at the December contract there is some support at $1161, which is right where last night closed. In early trading this morning the market is around $5 higher at the time of writing this. Slightly below that support level we also have the 200 day moving average, which may also provide support. The 200 day moving average is currently sitting at $1150.

Candlechart pattern wise we have 3 consecutive red candles, which indicates 3 straight down days, with yesterday being a log red candle for the large move down from highs of $1190, down almost $30 in the day to $1161.8.

The short term is without doubt down, but the long term trend is still up and the market is above the 200 day moving average, which many traders will be watching. There are still other levels of support in this market that need to be cleared before a long term change of trend to down is confirmed, so for now we are sitting on the sidelines in this market. Longer term we’re still therefore only looking at spread betting strategies from the long side, but will need to see a move back above $1222 before there is any upside momentum.

Good trading

Phil Seaton

PS. Find out more about LS Trader financial spread betting system and our spread betting strategies by clicking here.

Over the past couple of weeks or so we have been writing about some key levels in the stock markets and some key things to be looking at when spread betting stocks, in particular the S&P 500. We have been writing about the importance of key long term support at 1034.8 on the S&P 500 September contract and how we expected that that level would be tested if support at 1070 failed.

We had written previously that the failure to push up above the resistance area around 1120 did not bode well for the short term since and the doji patterns that had formed at those levels confirmed upside resistance, indicated that the market was tired and changed the short term trend from up to neutral. It did not take much more from there to send the market lower towards short term support at 1070.

Yesterday the 1070 support level failed and this triggered a big down day for stocks and the S&P 500 fell all the way to the long term support level, briefly piercing support with a new contract low of 1030.5 before a slightly higher close at 1035.3, just above major support. This represented a decline of 3.32% for the day. This was also followed by major moves in the other stock indexes, which included failure for the Dow 30 at 10000 and the FTSE falling through 5000 and means that today is very likely an important day for the stock markets.

At the time of writing this, which is fairly early on Wednesday morning, the stock index futures are pushing marginally higher and it would not be too unusual to see a bounce higher in early trading after the size of the move yesterday. What happens during the rest of the day remains to be seen but the key thing to look for today for those of you who are spread betting stocks is a move back below support at 1030.5 and in particular a close below this level.

There will always be those traders who try to pick bottoms in markets and buy at support levels and we may see some of that today but although the market is pretty much dead on the major support level now there are currently no reversal signals, so trying to buy the bottom is a dangerous play. At LS Trader our approach is trend following, so we wait for support to fail and then use a momentum play to trade in the direction of the trend, which in this case will be down if support fails.

Should we get a move today back down below 1030.5 then the S&P 500 will likely be heading for the psychological round number of 1000 and below that down towards support around 965-970 and possibly further out towards 860, which would complete the previously mentioned head and shoulders top.

Let’s just recap the importance of the 1034.8 level that we have been writing about previously:

• A break of this support level would give new contract lows as well as being the lowest level seen on the S&P since November last year
• Our proprietary indicators at LS Trader would indicate that the long term trend has shifted to down should the market take out support here
• The previous sell off on 5^th February found support at this level
• This is also the level of the lows of the “Flash crash” day on the 6^th May
• Support from the lows of the hammer formed on the 5^th February is also at this level and a close below this pattern negates the support from the hammer.
• This level also represents the neckline of a head and shoulders pattern that would give us a target of 860 to the downside.
• Our longer term view on the stock markets is bearish overall and we expect significantly lower prices in the stock markets later this year or at the very least at some point during the next 12 months.
• We are also on a seasonal basis moving in to the weakest time of the year, with September being the weakest month on average

Until next time, good trading and good luck with spread betting stocks

Phil Seaton

PS. To find out more about the LS Trader financial spread betting system and our proprietary trading methods for spread betting stocks please click here.

Continuing our recent series of posts on how to spread bet gold today we look at what happened in the market on Monday 28^th June. Since our last post on spread betting gold last Tuesday quite a bit has happened to the gold market but most importantly, gold has not taken out the new all time highs that were posted on the 21^st June at $1266.50.

Therefore we still have not had the 2 closes above resistance at all time highs that we have been looking for over the past 2 weeks. This is an argument for the bearish side. In yesterday’s trading, a huge sell order hit the market, sending the price of gold tumbling by $20 in just over an hour and this was from just below resistance at all time highs.

Another factor for the bears is the possibility that on the weekly charts that a morning star pattern is forming. A morning star is a 3 bar pattern over any time frame, so this could be either daily or weekly. To me patterns or bar periods of less than a day are completely irrelevant and not even worth looking at. For confirmation of this pattern, we do need the close of the third bar, which in this case would be the all important Friday close this week. This Friday’s close perhaps carries even more significance, as it is the Friday before the long holiday weekend in the US for Independence Day on the 4th July.

So, getting back to the morning star pattern, this is a reversal pattern from Japanese Candlestick charting techniques and if the pattern completes it would suggest a top, at least for now in this market. However, and this is the key thing, one should never anticipate a pattern forming and jumping the gun prematurely. Clearly on Monday, there are still 4 trading days to go before Friday’s close so much can still happen. What we can say is that the first 2 bars of this pattern are in place (the previous 2 week’s bars) and that as of now, Tuesday morning the third bar is forming in the right direction.

Last week we also had a bearish engulfing pattern form on the daily charts and as the name suggests, this is a bearish pattern and a reversal signal. This pattern adds to resistance and is only negated when we have a close above the top of the pattern, which incidentally is also at all time highs at $1266.5. A close above this level would be bullish, both from the fact that it would be a new all time high close and that it would cancel the bearish engulfing pattern.

At LS Trader we do not use reversal patterns to initiate trades as they are reversal patterns and necessarily counter trend. The correct way to use candlestick patterns is by seeing the pattern fail and using that as a momentum indicator. Since LS Trader is a trend following system, we are momentum traders. Therefore we look for markets to continue the current momentum or trend. In the case of gold, this is still up and we would not consider any short trades at this time.

Another thing to look at on the gold chart is the ascending triangle that we have written about previously. This is still holding, both at the top where resistance is in place at $1266.5, and also at the bottom of the triangle from the upward sloping trendline. This is currently bringing support to the market at around $1231, which was just below yesterday’s lows at $1235.9.

As we have written previously, if support holds from this upward sloping trendline we may yet see a move back up towards the top of the pattern and new all time highs. Conversely, a break through this support line will likely see the market push lower towards support around the $1215 area. Around this level we still have a bullish engulfing pattern confirming support and that pattern should continue to provide support until the market closes below that level, at which point the pattern and support would be negated.

As ever, the most important thing to look at is the current trend. In the case of gold, both the long term and short term trends are up and this puts the odds slightly in favour of higher prices, although the longer that it takes to clear resistance those odds reduce and increase the odds of a top forming.

At LS Trader we remain long gold, as we have been since the 26^th April where we entered at $1153. This is consistent with our key successful financial spread betting principles of trading with the trend and letting winning trades run. We will continue to stay long as long as key support holds in the knowledge that even if the trend reverses that we will exit with some profits intact. This is the correct way to spread bet gold.

Good luck in your financial spread betting

Phil Seaton

PS. You can find out more about how to spread bet gold with the LS Trader financial spread betting system please click here. The system comes with a 30 day no questions asked money back guarantee

Continuing our recent series of posts on stocks and spread betting stocks, in particular the S&P 500, we eventually got the breakout that we had been looking for. As we had indicated may be the case yesterday, due to both the long term trend and the steady progression higher over the past few sessions from support, the S&P 500 broke out of the range to the upside, with the S&P 500 clearing resistance at 1101.5 and closing at 1109.2 on the September contract.

This recent sideways action went on for 18 sessions before the breakout occurred and the close above the intervening high between to the 2 lows of that range means that the double bottom is confirmed. In addition, the close is also above the high of the shooting star pattern from previous day’s session. The shooting star is a reversal pattern and a close above it means that it is no longer valid. Therefore, things in the short term are looking better than they have been of late and we may get a continuation higher from here.

The question now is how far can this move continue? As we wrote yesterday, one way of getting an idea of the potential move is to take the height of the immediately preceding lateral trading range and add it to the breakout level. Doing this can give us an indication as to how far the breakout may go and where the market may end up. In this instance the range is around 65 points, so we can look for a continuation higher possibly to around 1165. There is some resistance at around 1142 that may come in to play prior to that target. There is also resistance from a falling window around the 1142 to 1151 area.

It remains to be seen as to whether we get sufficient strength in this market for it to generate a buy signal and we will look to the action over the next few sessions and in particular the weekly closing prices before initiating any position. The LS Trader financial spread betting system has specific rules that dictate when and where we enter any position and it takes more than just patterns to enter a trade.

Good trading

Phil Seaton

PS. You can find out more about the LS Trader financial spread betting system and how we combine financial spread betting with our trend following system by clicking here. The system comes with a 30 day no questions asked money back guarantee

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

Mistake #7 Listening to the news and fundamental analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A good trading system such as the LS Trader financial spread betting system will automatically get you in to the market when the conditions are optimal. It will also get you out of the market if things are not going for you with a minimal loss. You do not need to know the reasons why a market is moving up (or down) only that it is and then jump on board. This is the way to make consistent profits trading the financial markets.

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

Good luck in your trading

Phil Seaton

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

Here is the 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.