Chapter 13. Spread Betting Strategies

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Using smart spread betting strategies dramatically increases your odds of being a consistently profitable trader.

We’re now moving onto Part III of the guide where we’ll show you how you might get good at trading. In this chapter, we’ll cover the importance of trading strategy.

Every good, solid spread bettor relies on one or more good, solid spread betting strategies. Using a specific trading strategy – a spread betting system – accomplishes a number of important goals for a trader engaged in financial spread betting.

  • A trading strategy provides a logical reason for entering a trade – rather than just betting “up” or “down” based on random.
  • A trading strategy identifies and helps to pinpoint for the trader both entry and exit points – such as “take profit” targets – for a trade, helping them to structure the trade.
  • Using a well thought out trading strategy is an essential part of risk management in trading.
  • A trading strategy also helps traders decide on their stakes for trades – how much they are betting on each trade.
  • Having a trading strategy gives traders a framework, or reference point, for market analysis.

To note
If the strategy a trader employs is a trend following system, then the trader can focus his or her market analysis on identifying or confirming the market trend – and also on keeping a watchful eye out for signs of a possible upcoming trend reversal.

Popular trading strategies

It’s impossible to list all the different types of trading strategies that a trader might use. That said, these are some of the most common types of trading strategies, along with some spread betting tips on how best to use them to your advantage.

Trend Following Strategies
Trend following strategies are popular with long-term traders, those who might place futures spread bets to take advantage of major market moves. Trend following strategies are also referred to as “buy and hold” strategies since they usually involve holding a market position for an extended period of time.

Trend following strategies are typically guided either by fundamental analysis or by technical analysis that focuses on longer-term charts – such as the daily or weekly charts. Moving averages are a popular technical indicator used by trend followers.

Food for thought
In the stock market, a bullish trend is generally thought to be in place as long as a stock’s price remains above its 200-day moving average.

Breakout Trading Strategies
Many traders look for an opportunity to trade “breakouts” because such trades may afford the opportunity to make substantial profits while strictly limiting potential losses.

A bullish breakout occurs when the price of a financial asset breaks above an identified resistance level, such as a price level that a security has previously turned back to the downside from.

Many traders look for an opportunity to trade “breakouts”
Traders buy into such a price breakout on the theory that if the asset’s upward price momentum is sufficient enough to break through a significant resistance level, then there is likely to be enough buying pressure to carry the price of the security substantially higher.

A downside, or bearish, breakout occurs when the market price drops below an identified major price support level.

Breakouts may also occur to the upside or downside after a security has traded for some time within a fairly defined price range, with no clear trend one way or the other. In such cases, the price breakout is seen as establishing a new trend which should control the market for some time to come.

Trading breakouts is appealing not only for the profit opportunity, but also because breakout trading strategies are relatively simple to execute. On the bullish version traders simply place a “buy stop” order above the identified resistance level – the order is triggered and filled only if a price breakout occurs.

Expert tip
False breakouts – where price temporarily moves above the resistance level, but then promptly falls back below it – frequently occur.

In order to avoid suffering losses from trading such false breakouts, many traders use a momentum indicator such as the ADX or MACD to confirm the existence of a solid trend.

Market Reversal Strategies
Some traders focus on using trading strategies designed to catch market reversals – when a trend change occurs from an uptrend to a downtrend, or from a downtrend to an uptrend. Market reversal strategies are often employed by day traders looking to trade off a market’s intraday high or low.

Japanese candlestick reversal patterns are a popular technical indicator used to identify market reversals. Shooting star or hammer (also known as “pin bar”) patterns often indicate a pending market reversal. 

Some traders look for price/momentum divergence indications from momentum indicators such as the RSI or MACD as signals of potential impending market reversals. A reversal is usually confirmed when price crosses over a major moving average, such as the 10- or 50-period moving average.

Swing Trading Strategies
Swing trading – also referred to as position trading, range trading, or pullback trading – is really just a shorter time frame form of trend following. Swing traders look to enter multiple trades in order to take advantage of the interim highs and lows that occur in the course of a longer-term overall trend.

Price movements, either up or down, of a security do not usually occur in a straight line. Rather, there are “waves” of price movement.

For example
The price of a stock might advance five points per share, then retrace back downward two or three points, then advance upward another four or five points, followed by another downside retracement…and on and on.

Swing traders aim to buy the interim lows that occur with a temporary downside pullback or retracement, and then sell the next interim high that occurs.

In order to identify probable highs and lows in order to take advantage of swing trading opportunities, spread bettors who swing trade often use a number of technical indicators.

These include:

  • Moving averages
  • Momentum indicators
  • Various chart patterns – such as ascending or descending triangles
  • Identified support and resistance levels
  • Specific technical indicators such as Fibonacci retracements

Choosing a financial spread betting strategy that suits you

There is a virtually limitless variety of spread betting techniques, or strategies, for a trader to choose from.

When examining various spread betting strategies and deciding which one(s) to use, it’s important to select a trading strategy that suits you personally. Here are some factors to consider in picking a strategy that fits your personal trading style:

 Factor 1  – Risk tolerance

You must have a clear idea of your risk tolerance in order to select a proper trading strategy – i.e. one that you’re comfortable with. If, for example, you have a very low risk tolerance, then you will want to use a trading strategy that places strong emphasis on limiting risk.

Also, a low risk tolerance makes you more well-suited for trading longer term time frames rather than engaging in day trading, which typically involves taking higher risk trades.

 Factor 2  – How much time you have to devote to trading

The time you have available to commit to market analysis and trading is another important factor in choosing a trading strategy. If you are retired, or work at home and are relatively free to choose your own work hours, then you may have the available time to monitor the market continually. Therefore, if you wish, you can utilise day trading strategies where you enter and exit a trade within just a matter of hours, or even minutes.

If, on the other hand, you do not have the free time available to watch the market throughout the trading day, then the only strategies that will be appropriate for you to use are those that only require “end of day” market analysis – and that can be implemented by entering orders prior to, or around the time of, the market open, and that does not require constant monitoring of the market in order to manage.

 Factor 3  – Your choice of asset class and market

Financial spread betting offers you the opportunity to profit from betting on hundreds of different financial instruments in the following asset classes: stocks, indices, bonds, commodities, forex, etc.

Most spread bettors concentrate their efforts on betting on the financial instruments of just one asset class, such as stocks or a stock market index. Many trading strategies are specifically designed to be used in placing bets on just one type of underlying asset. In other words, there are specific forex spread betting strategies and specific stock or index trading strategies.

 Factor 4  – The type of market analysis you use

Do you prefer to use technical analysis or fundamental analysis? Obviously, spread betting strategies designed for use with fundamental analysis differ significantly from those that employ technical analysis.

 Factor 5  – The kind of trading strategy you prefer

Trading strategies vary in any number of ways. Ultimately, you just want to find a trading strategy that feels comfortable for you. If you’re not comfortable with your chosen trading strategy, then it’s unlikely that you will be very good at executing it. Therefore, it helps to think about just what general types of betting strategies you prefer using.

Choose your strategy
Are you more comfortable with using simple strategies that are easy for beginners to use – or do you prefer utilising more advanced strategies that employ trading techniques such as hedging or arbitrage?

There are many things that may influence your choice of a spread betting strategy.

In the end, the most important thing is to select a trading strategy that you like and that you’re comfortable using (and, of course, that’s profitable!).

Of course, you should feel free to try out different strategies, and you may find that your strategy preference changes as you become more experienced at spread betting.

Read: 

A final point

Whichever spread betting strategy you settle on, make sure to follow the rules of the strategy with strict discipline. Studies of traders have found that many of them had a trading strategy that should have proved profitable overall, but that the traders lost money because they failed to strictly abide by the rules for implementing the strategy.

Interestingly, most traders erroneously believed that their trading strategy was flawed – failing to realise that it was their faulty execution of the strategy that caused them to have unnecessary losing trades.

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