Spread Betting Trading Strategies
Spread betting strategies are as varied as the number of traders working in any market environment. Most traders have different investing needs and different styles for meeting those needs. Luckily, there are specific and well-researched trading methods tailored to each type of spread betting strategy.
Whether you are looking to trade trends, ranges, reversals or breakouts, or you want to respond to fundamental news, there is a spread betting strategy which has been time-tested for achieving favourable results. Here we will cover the basic ideas of each of these core strategies and summarise how each may lead to financial gains. 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, described as trend following. 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 timeframe) show higher highs and higher lows (higher peaks and troughs). Without these characteristics a clear uptrend is not in place, but if these higher peaks and troughs are seen many traders would view this as a bullish signal and establish a buy position. Conversely, downtrends are seen when prices show lower highs and lower lows. When prices meet this condition a trader might choose to enter a sell position based on the assumption that the trend is more likely to continue than it is to reverse. You can perform trend following methods on any timeframe but they commonly suit longer timeframes (daily or weekly) as 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’). Here 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 favouring trend trading) but there are some clear advantages to reversal trading not found with other techniques. It is true that reversals can be harder to identify than larger trends, but reversals allow for more favourable entry points (buying low and selling high). By contrast trend 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 favourable entry levels and much larger profits when successful.
Next we will look at range trading, which inverts the logic of trend-based strategies. Here, support and resistance levels are identified (previous levels where buyers and sellers have entered 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. Stops 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 is 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 a 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 the strategy are the difficulty in placing stops and the fact that the strategy essentially requires traders to ‘buy high and sell low’, which of course is not the most favourable area for entry. Many traders, however, prefer breakout spread betting strategies because they allow for very clear entry levels, which often correspond with increased volatility (and therefore greater profits). More on breakout trading.
The last spread betting strategy we will look at is news trading. This strategy is different from the others we have described (which rely heavily on technical analysis) as it requires an understanding of macroeconomic 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 key news events are the release of quarterly earnings reports by corporations or 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 macroeconomic indicators as this is the only way to forecast the market response to different types of news story.
Many spread betting strategies are out there
The trading techniques described above by no means represent an exhaustive list of spread betting strategies. Here we have merely summarised the underlying arguments used in the most popular spread betting strategies. Most techniques rely on an understanding of technical chart analysis but, as we have seen, there are also strategies for traders looking to use macro data as a way of determining their trading bias.
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 conflicts) 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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