In my previous articles, I have shown that using very simple concepts when applied to financial spread betting systems, we can trade markets, such as the Dow Jones Index, the emini S&P 500, or the FTSE 100. Then we can build a reliable online financial spread betting trading strategy that can generate big profits over time.
There is no doubt that building such a system can give you an edge over most other traders, who do not possess such a strategy. That is what we want as individual traders – a clear edge. That means, we can be wrong 6 or even 7 times out of ten trades, and yet still make profits. That is because we let our winners run and cut our losses short. I will look at how we can let our winners run in another article – there are some little-known techniques that can be used effectively.
By thinking along these lines, we do not adopt the common habit of being married to a position! A trade will either give us a win or a loss (or break-even). All that matters is that the sum of the winners should be greater than the sum of the losers.
In practice, how do we do this? Let’s say we want to buy Gold on an online financial spread bet which is trading at $1200 – $1220. We spot a good place to enter at $1210, and place our protective stop at $1195, risking $15. Let’s say we are betting with £2 per point. That means our risk is £300.
Our target for Gold is $1240 for a potential gain of $30, or a potential profit of £600. The risk/reward ratio is then 2:1. This is too low, and we abandon the idea as it doesn’t meet our Rule of a 3:1 ratio minimum. We have this ratio as a minimum because we can have 3 times as many losers as winners – and still be evens! That means we only need 3 winners out of 10 and still be ahead.
Let’s say our target is $1260. Then our risk/reward ratio is 3.3:1. It is then OK to take the trade. If the market moves up to $1240, we can move our protective stop up to break-even at $1210 for a risk-free trade. The market will either reach our $1260 target for a profit of £1,000, or come back down and run through our stop for break-even.
We are now treating our trading the financial markets as a business when we use this rule. In further articles, I shall be looking at other rules that make up one of the good financial spread betting systems for online financial spread betting.