Spread Betting Strategies: Moving Averages
Another benefit of using moving averages as part of a spread betting strategy is that the calculation used to plot these lines lacks subjectivity. This provides a stark contrast to chart patterns, which are almost totally subjective and will show subtle differences from trader to trader. Even when computer software is used to plot chart patterns, the results can be mixed because the criteria for the software application will still need to be defined by individual traders and there will always be some level of disagreement.
This, however, is not the case with moving averages because of the nature of the individual calculations. More specifically, a moving average will add all of the price values taken over a given time period and then divide the total by the number of intervals. For example, a 100-day moving average will add the price values of the 100 previous days, and then divide that total by 100. This divided value is then plotted on your chart and forms a sloped line against the actual price activity.
Applying moving averages in your spread betting strategy
Next we need to identify specific spread betting strategies using moving averages. Many (probably most) traders will use a combination of two or three moving averages to generate trading signals for position entries. One situation occurs when a shorter-term moving average crosses above or below a longer-term moving average. For example, if a 100-day moving average moves above the 200-day moving average, this would be an indication of bullish momentum, and you could establish a buy position. The reverse, of course, would be true if the 100-day moving average crosses below the 200-day moving average.
A similar spread betting strategy can be used when the price activity itself crosses above or below these averages. Prices moving above the 100-day moving average would generate a buy signal. Prices moving below the 100-day moving average would generate a sell signal. We can see that this strategy is very different from analysing chart patterns because these ‘price breaks’ are essentially objective and will not be interpreted differently by individual spread betting traders.
Use the strategy as you want
One final note, in the above examples we cite the 100- and 200-day moving averages but you should remember that spread bettors can use any timeframe and tailor it to any trading style. For example, some traders prefer to use much shorter-term averages (such as the 10-period or 21-period moving average) so we can see that trading styles are not limited by standards set by other traders. Spread betting strategies using moving averages can be altered to fit your individual trading needs and this flexibility is one benefit that many traders welcome when seeking to identify new position entries.
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