What is your financial spread betting system? What is your edge? This is possibly the most crucial question for you to answer. You need a system. So what should your trading system be? Well I will be going into what you can use as a trading sytem in later posts but wanted to introduce the idea of having a system now.
You need an edge; you need something that will produce you returns over the long run. Obviously your edge doesn’t have to mean you are right every time but should yield a positive expected return.
“Can my system be hunches or should it be systematic?”
There are traders that can make money through hunches, I don’t know any though! I know traders who make money from systems.
I will be doing a book review of ‘How I made $2,000,000 in the stock market’. It is by a dancer called Nicolas Darvas. He didn’t have a proper edge when he started out and he lost money, quite a bit of money but…. then he developed his edge. The title of the book gives away what happened next.
When you are starting out you may not have a financial spread betting system to use. What should you do then? Well, you have 2 choices, you can use someone else’s (preferably a successful trader) or you can develop your own.
Either way you need to ensure that while you are testing your edge that you aren’t risking too much per trade. I think it is safer to buy a book written or attend a seminar by someone who has been successful with trading (it doesn’t necessarily have to be somebody who has been successful in financial spread betting itself) and use his or her systems until you develop your own.
I will be doing a number of book reviews which I hope will put you on the track of some great informative books that should help you find a system. I would be grateful if you contact me with your book review suggestions too.
So if you are developing your own trading system then how should you go about it? There are 2 types of testing that you can do, there is in the field testing and there is back testing.
In the field testing is when you actually trade the system live. You can test with actual money or you can paper trade. I would advise that you paper trade to begin with but if you do test with actual bets then keep the bet size small.
Back testing is when you run that test against historical data. The advantages of this type of test are that you can get your results almost instantly, you can test the system across many different markets and over different time periods and you don’t risk a penny.
There are some disadvantages associated with back testing data. Just because the system was successful in the past it doesn’t mean it will be successful in the future. Also, just because it didn’t test well that doesn’t mean that from a bit of tweaking it won’t work well in the future, trading live could point you in that direction.
You need to do back testing over multiple time periods as some systems can seem really successful but then when you change the periods slightly, the whole performance falls off. You want a financial spread betting system that is robust and will have a positive expectation of making money in the long run.
It is probably best to combine the 2 methods. Do a bit of back testing first followed by small tests in the field. Even if you are using another trader’s strategy do some small tests in the field before you throw too much money at it. Systems can suit certain individuals more than others.