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Why you should always use stops[Updated on 17/05/10]
I have received a lot of mail—mostly from those new to financial spread betting—wondering whether stops losses are really not just another way for the spread betting companies to make money.
While conspiracy theories such as these may make for good forum discussion, my recommendation to all short term traders is to always use stop losses—if only to take the emotional weight off your shoulders!
The most prominent advantage of using a stop loss (or more precisely, using a guaranteed stop loss) is that it lets you determine in advance your maximum downside exposure. That is to say, you know exactly how much you stand to lose if things go wrong. This is not trivial. Remember that famous disclaimer and risk warning: “financial spread betting carries high risk and you may lose more than you invest”!
Happy spread betting!
Macroeconomic data releases are important—even for short term traders and spread betters. [Updated on 12/04/10]
A lot of short term traders—and I mean both reasonably experienced private traders and complete newbies to spread betting—often focus exclusively on technical analysis in their assessment of potential trading opportunities.
Technical analysis is easy to learn, straight-forward to apply if you know what you’re doing; and the same techniques are applicable to a wide range of markets.
Indeed, all of these (and more) are valid reasons for tilting your analysis heavily in favour of technical analysis BUT they are not valid reasons for shunning fundamental analysis and macroeconomic assessments altogether. Doing so can be dangerous to your spread betting account balance!
Take for example, the equity markets’ performance in recent days leading up to yesterday (Friday July 10).
Following a low of 8057.94 on Wednesday 8th of July, the Dow recovered to close at 8178.41—a remarkable 120.47 points off the intraday low. That turnaround helped to improve the short term technical picture for the index and things looked set for some upside follow-through, at least in the very short term. Indeed, many City traders were looking for a weekend rally to follow on Friday 10th.
Instead, they got a sudden market selloff? Why?
Friday’s data from the University of Michigan’s Consumer Confidence Index showing a deeper-than-estimated decline in consumer confidence stoked concerns that the US economic recovery might be stopped in its tracks.
So, in summary, of course, financial spread betting is predominantly a short term endeavour. Nevertheless, there are a number of crucial fundamentals that even short term spread betters cannot afford to ignore.
The idea is to ensure that your technically-motivated trade is in a direction that is consistent with the important economic data that have the power to define market trends.
Read the extended article on useful economic data for spread betting.
Hope you’re all having a great weekend
No fear just loathing in the equity markets
[Posted on 10/07/09]
Between making it’s low on March 9th 2009 and the recent rally’s peak on June 12th 2009, the S&P 500 index gained about 40%, returning one of the best three-month performance in the history of the stock market index.
Keen analysts and spread betters would have noticed that the sharp rally was accompanied by a correspondingly large decline in the volatility index (VIX). Indeed, the VIX traded from a high of about 80.86 reached at the height of the credit crisis to a near-term low of 25.35 at the end of June.
In a reversal of short term trend, the volatility index has now started picking up again and currently rests just below its 50-day moving average (50-day MA is at 30.45). Since the June 29th trough of 25.35 was reached, the VIX has moved higher, hitting 33.05 intraday on Wednesday 8th of July. Conversely, the S&P 500 index has lost ground since it’s June 12th peak at 946.21 and now trades about 7% lower.
The moral of the story?
Short term traders and spreadbetters would do well to pay close attention to the VIX in assessing the outlook for the major equity indices.
P.S.: The VIX reflects investors’ risk aversion and measures expectations of market volatility over 30 days. This index remains the main gauge of ‘fear’ or nervousness in the market.
Turns out THERE IS such a thing as a free lunch!
[Posted on 09/07/09]
In my post yesterday (see below), I noted that the breach of 8200 in the Dow opened up the immediate downside target price range of 8100–8115 which we expected to be hit shortly.
I went on to state that any economic news-induced rally to that previous price support level at 8200 would meet with resistance and provide an opportunity to short the index in anticipation of a drift lower to the target price range at least in the very short term.
Well, as things turned out, the Dow initially rallied to 8219.52 before the anticipated decline began, taking the index all the way back to 8087.19. That range provided the expected opportunity for at least 85–130 points of spread betting profits.
This sort of easy money trades don’t happen every day but when they do, they essentially represent a free lunch for astute spread betters.
Although the Dow recovered late on Wednesday to close just under 15 points higher, the big picture clearly shows that the downturn continued over the period since the last Market Timing Update—just as we anticipated.
The first downside target of 8200 was exceeded and the break of 8200 led to a move to the next price target of 8100-8115. However, as things stand, the technical evidence suggests that we may now see some recovery in the index over the next few trading sessions. It is not yet clear at this point how sustainable the upside momentum would be since any negative economic news could derail the fragile attempt at recovery.
Clear trade entry points—if the technical criteria are met—will be outlined in the Market Timing Update on an ongoing basis.
US Stock Futures Rise But Technicals Suggest Further Selling
[Posted on 08/07/09]
Equity market futures got a temporary respite from the recent bout of selling pressure today after the International Monetary Fund (IMF) published an update to its global economic forecast, boosting growth estimates.
The IMF said that the pace of global economic recovery next year would be stronger than it previously estimated in April. The new forecasts now see the world economy expanding by 2.5% in 2010—a notable increase from the 1.9% projection released in April. However, the anticipated contraction for 2009 was slightly worse at minus 1.4 per cent, compared to the previous estimate of a 1.3 percent decline.
On the back of the news, futures on US stock indices recovered lost ground this morning.
Unfortunately, the technical evidence at this juncture suggests that those spread betters looking for new entry points for long positions should not hold their breadth! If anything, the temporary bounce may well provide decent entry points for short selling the major indices.
Take the Dow Jones Industrial Average. An important short term price support level was broken yesterday with a move below 8200. That opened up the short term downside target of 8100–8115 which we expect to be hit shortly.
Consequently, an IMF-induced move to 8200 early in today's trading session looks likely be an opportunity to short the index some more - at least in the very short term. Any change in the technical outlook will be discussed in the Market Timing Update tonight.
Free Market Analysis: have you read the last edition of the Spread Betting Opportunities
Benefits of paper trading[Posted on 07/07/09]
A number of new traders have asked me about the usefulness of paper trading so I thought I would touch on the topic briefly here. Further exploration is presented in the article on paper trading.
It goes without saying that there is a tremendous difference between paper trading and trading for real. For a start, risking fantasy money does not trigger the same sort of emotional and psychological reactions that placing real hard-earned cash on the line does. This is a real downside since one of the key attributes that paper traders seek to develop is emotional discipline.
Nevertheless, there are a number of reasons why paper trading comes highly recommended:
—Learning the mechanics:
New traders need to be able to identify profitable spread betting opportunities, determine trade entry points, calculate optimal bet sizes, determine appropriate stop levels etc
—Acquiring real time trading experience:
There is only so much that can be learned from books and trading courses. A new trader needs real time in the markets to fine-tune the newly-acquired skills. Paper trading enables a trader to do this while eliminating the financial cost of the experience. Furthermore, by keeping a trading log or journal, you can identify and hopefully correct areas of weakness.
—Learning to use the broker’s trading platform:
Many spread betting companies now offer paper trading services to new clients. Using your chosen broker’s platform in this way enables you to master the operational elements of the broker’s platform. Fat finger mistakes (where you accidentally enter the wrong bet size or incorrect company name) do happen and it is better to make such mistakes when you haven’t got real money on the line.
Common spread betting mistakes to avoid[Posted on 06/07/09]
In a recent article I outlined a list of the most
common spread betting mistakes that beginners tend to make. While this is not an exhaustive list, the ten trading flaws outlined here comprise the main ones that have been highlighted by some of the new spread betters that have attended the short term trading skills course.
(1) Herding behaviour
(2) Information overload
(3) Hoping that losses would turn around
(4) Failure to really understanding risk
(5) Not having concrete investment objectives
(6) Trading without a plan
(7) Not using stop losses
(8) Irrational expectations
(9) Trying to pick exact market tops and bottoms
Since the need to eliminate such spread betting errors cannot be over emphasised, I thought it might be worth repeating this list here in the spread betting digest section of the website.
Pain for the Dow—gains for us![Posted on 04/07/09]
Once US investors get over the hangover from the July 4 Independence Day holiday, they will start to ponder what information may be contained in the nasty selloff seen in the last trading session of this past week.
Thursday saw a dramatic selloff in equity markets, with the FTSE 100 index shedding over 106 points (2.45%). The Dow Jones Industrial Average lost 223.32 points or 2.63% in the trading session, closing at 8280.74.
While the selloff was heavy and unrelenting, it was not unanticipated. In fact, on Thursday morning, several hours before the US markets opened, I posted the latest edition of my monthly free market analysis assessing the outlook for the Dow and the Footsie.
I concluded that analysis by stating that “The short term technical outlook is likely to be determined by the outcome of the price movements within the range: 8435—8570. Conservative traders would wait for a clear break of one of those price areas and then trade in the direction of that break in the expectation of price follow-through.”
The Dow’s close at 8280 on Thursday was notable. Why? The 8280–8250 price range was identified as the key short term support level to watch out for in the event of a breach of the lower end of the narrow trading band (8435–8570) that the index was in at the time.
The fall in the Dow provided handsome profits for those of us who entered short positions from 8435. 155 points and counting!
Now, that’s what I call market analysis! A glimpse into the future—not a glance at the rear-view mirror!
Hope you're all having a great weekend!
Has the market bottomed?[Posted on 03/07/09]
In a recent survey of professional investors, nearly 40% of those questioned said that the equity market bottomed out early in the year. A significant proportion of institutional fund managers believed that the market had rebounded and was destined to move higher still in the months ahead. Many of the major financial media outlets have also carried stories wondering whether the rally in equities since the March lows was the real deal.
This is all well and good. However, from the perspective of a disciplined spread bet trader, it need not matter whether the market has turned higher for good or whether the entire rally from the March lows is just another bear market upswing destined to fizzle out.
Short term traders should focus on market trends and trade in line with the dominant trend to the exclusion of everything else. We are active traders. Leave the talking to the journalists—that’s what they’re paid to do! The typical journo has never placed a trade in his or her entire writing career! “Why is the market up?” “Why is it down?” “How long is this rally going to last?” “Is the bear market over?” From our perspective, all of this talk is largely academic!
So long as there is an identifiable trend—whether it’s up or down is irrelevant—there is a spread betting opportunity! Focus on what matters.
Happy spread betting!
How to handle market volatility[Posted on 02/07/09]
High level of price volatility is usually the name of the game in currency trading. However, even by historical standards, price movements in the Cable (Dollar/Sterling exchange rate) have been quite eye-popping of late.
Take a couple of days ago on Tuesday June 30th, the Cable rallied all the way to around $1.6743 before heading back down again to $1.6385—a whooping 358-pip trading range in one day! Likewise, yesterday’s trading range of $1.6385–$1.6545 represented a 160 point intra-day range. Over the past 30 trading days, the Cable has moved between $1.5803 and $1.6743, representing 940 spread betting points. The heightened volatility has even experienced professional traders scratching their heads!
So what’s a trader to do?
—novice traders should shun day trading and attempts to scalp for a few points here and there and instead focus on the big trends;
—both novices and experienced traders alike will do well to remember to trade in the direction of the dominant trend;
—set appropriate stop losses to avoid whipsaws;
—do not over trade: use optimal bet sizes to mitigate downside risk.
Happy spread betting!
The Spread betting digest
section of the website presents brief industry updates, market analysis, financial commentary and general musings about spread betting in particular and the financial markets in general by Alexander Olah, the editor of the spread bet trader website.
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