Spread Betting Trading Strategies

Spread betting strategies are as varied as the number of traders that there are working in any market environment.  Most traders have different investing needs and opposing styles for meeting those needs.  Luckily, with the vast body of research that has been done into trading methods, there is a specific style that is tailored to each type of Spread Betting strategy.  Whether you are looking to implement range trading methods, trend following, reversals, breakouts or fundamentally based news trading, there is a Spread Betting strategy that has been researched and time- tested for achieving favorable results.  Here we will cover some of the basic ideas in each of these trading styles and summarize the ways financial gains can be realized with each one.  This is by no means a full list of potential strategies (as there are far too many to discuss here) but these are some of the most commonly implemented strategies seen in today’s trading environment.

Perhaps the most common method used by traders (especially new traders) is the use of trend direction in determining position entries. This is typically described as Trend Following and with this method, traders look at the underlying momentum in market prices before determining their trading bias.  Price activity is generally thought to be in an uptrend when charts (on any time frame) show higher highs and higher lows (higher peaks and troughs).  Without these characteristics, a clear uptrend is not in place and “buy” positions would not be established.  But if these higher peaks and troughs are seen, many traders would view this even as a “bullish” signal and buy the asset.  Conversely, downtrends are seen when prices show lower highs and lower lows.  As long as prices meet this criteria, a trader could choose to enter into “sell” positions based on the assumption that the trend is more likely to continue than it is to reverse.  Trend Following can be done on any time frame but is more common on longer time frames (on a daily and weekly basis) because once trends are in place, they tend to continue for long stretches of time.

Another common strategy is Reversal Trading (which is also referred to as Contrarian Trading).  With this method, traders are looking for potential areas where trends (either uptrends or downtrends) are over-extended and ready to reverse.  Essentially, these traders look for “buy” entries when a downtrend is seen reversing (and moving higher) and “sell” entries when an uptrend is nearing completion to the upside (ready to turn lower).  Many new traders are reluctant to try this method (instead favoring Trend Trading) but there are some clear advantages to Reversal Trading that are not present with other techniques.  It is true that reversals can be more difficult to identify than larger trends, but reversals allow for more favorable entry points (buying low and selling high) and this is the opposite of what occurs with Trend Following (where traders are entering positions much later, after most of the activity has already occurred).  Spotting reversals is a complicated Spread Betting strategy, but with practice and the use of indicator tools, contrarian signals can lead to much more favorable entry levels and much larger profits when successful.

Next we will look at Range Trading, which inverts the logic of trend following strategies.  Here, support and resistance levels are identified (previous levels where buyers and sellers have entered into the market) and traders base position entries on the assumption that these levels are significant in market psychology and will continue to hold in the future. These traders will set “buy” positions when prices are approaching support and “sell” entries when prices approach resistance.  Many new traders use this strategy because it allows for easy stop loss placement. Stop losses are usually placed just outside of the trading range, as a break of these levels would signal that the range is no longer valid.

An alternative to these methods can be seen with Breakout Trading, which is a type of continuation strategy where prices are expected to extend higher (in an uptrend) or lower (in a downtrend).  Generally, support and resistance levels are identified and traders wait for new highs and lows to be posted before new positions are triggered.  For example, when price breaks above a clearly defined resistance level, traders will view this as evidence that an uptrend remains in place and open “buy” positions based on the assumption that prices will continue higher.  The reverse would be true for prices that have broken below significant levels of support.  Potential problems with strategy come from the difficulty in placing stop losses and the fact that the strategy essentially requires traders to “buy high and sell low,” which of course is not the most favorable area for entry.  Many traders, however, prefer Breakout Spread Betting strategies because it allows for very clear entry levels, which often correspond with increased volatility (and therefore greater profits).

The last Spread Betting strategy that we will look at is News Trading.  This strategy is different from the others we have described (which rely heavily on technical analysis) and require an understanding of macro economic data and an accurate interpretation of news headlines.  This interpretation can sometimes be difficult (as there are many instances where market opinion is divided on an issue) but given that price activity is often dictated by an economic data release or positive/negative news headlines, this form of trading can prove to be highly profitable and easy to forecast.  Examples of news events can be seen when corporations release a quarterly earnings report, countries release government data (such as GDP or inflation figures), or when a geopolitical event is seen having an impact on market activity.  Traders must remember, however, to research the impact of macro economic indicators as this is the only way to forecast the market response to different types of news stories.  

The trading techniques described above are by no means representative of an exhaustive list of Spread Betting strategies.  Here, we have merely summarized the underlying arguments used in the most popular Spread Betting strategies.  Most techniques rely on an understanding of technical chart analysis but for traders looking to use macro data as a way of determining their trading bias, those types of strategies are available as well.  One important point to remember is that these strategies should never be combined for the same trade.  The underlying logic for each type of strategy is different (and often adverse), so all traders must remember that once a strategy is implemented, the initial logic must be respected and allowed to reach completion.

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