Trading Strategies

Now that you are nearing the end of this spread betting manual, you have the knowledge and are just needing the ways to implement your learning so that you can start researching and developing your trading plan. There are a few traders who will tell you that they have no plan, and are still successful, but they are few and far between. The chances are that they have experienced many losses over the years, and have developed an internal unwritten plan out of this from paying their dues before they began to make a profit. Unless you want such a long and costly apprenticeship, with no guarantee that you will ever make a profit, then you need to consider how you are going to select your bets. You need to have a consistent and repeatable formula for managing your betting, and not be deciding things “on the fly”, otherwise if you lose you will be no wiser about how to do it better next time.

When you are spread betting, you have two big advantages. One of them is the amount of leverage that you can use, compared to a simple stock trader; and the other is that you have access to virtually any financial market that you are interested in. Both of these can also be disadvantages if you misuse them, so you must use extra care when deciding how you are going to spread bet.

Access to different markets allows you to always be betting where the action is. Even though not all markets boom or bust at the same time, it is relatively easy to find possibilities for profit from boom or bust, Forex or stocks, UK or worldwide, etc. That’s why some traders feel that spread betting or contracts for difference, which can be used in a similar way, are the best ways of profiting from the markets. That said, if you can find a market to stick with you will get to know how it moves and be better able to find winning bets. Just because you can, does not mean that you should – in this case, betting on all the available instruments. Certainly when you are setting out you ought to concentrate on learning just a few markets thoroughly so you can bet consistently before adding more complication.

There will always be companies offering their own particular take on how you should bet. You can even find complete “done for you” trading systems, with the idea that you just follow the instructions and make a profit. It’s great to always be learning, and I am an advocate of continual education, as that keeps you from getting stale. In some contexts such as forums and training classes, it also allows you to compare notes with other traders, and provides the stimulation that you need in the long run. However, if you simply operate someone else’s system, you do not have ownership of it and may not have the commitment needed.

What can help is to start with a packaged system, and modify to suit your needs. That way, you do not start with a “blank sheet”, which can be intimidating, but you also adopt ownership of the system, and learn to trust it, which is important if you are to stick with it even when you have some failures. You can tailor the parameters to your time-frame, and your risk profile, which is just another way of saying whether you can sleep at night or not.

So with that preamble, let’s see what you should look for when making or adapting a trading system, and what approaches are available to you. It’s best to have a system of identifying your trades which can be explicitly written down, and not be subject to any discretion. Think of it as having a system you could give to someone else to use, and they would apply it in the same way as you. You need to have rules or decisions for every circumstance, otherwise your emotions can intervene and sabotage your betting. If possible, the system should be mechanical enough that it could be programmed into a computer, as this allows you to explore how it would have worked in the past, a process called back-testing.

One of the principles underlying many trading plans is the concept of a trend. As previously mentioned, the assumption is often that a price continues to go in the same direction until something acts to change that. So if a price is in an up-trend, it will continue to go up, and a down-trend will go on for a while before something happens to alter it. These strategies are called trend-following. To trade on this basis, you need to identify the trend soon enough to enjoy a profit from its movement, but not so soon that the apparent trend can fail and cost you the bet. If you can incorporate a gauge of the strength of the trend, so that you can close your position before the more visible sign of the price reversing occurs, then that may also help maximise your profits.

An alternative approach is to try and anticipate when a trend is finishing, and bet against the trend that is happening at the moment. These are called counter trend strategies. You have seen how some of the technical indicators can reveal a changing market sentiment, and provide you with a warning that a reversal is likely. A majority of the candlestick signals, which you may well incorporate in a trading plan to give you a signal on which to open your bet, are based around reversals rather than continuations.

There is also a technique to bet that doesn’t rely on knowing which way the trend will go. This sounds like the perfect choice, doesn’t it? You can’t bet on nothing, however, so even if you eliminate the direction of the trend, you need to have an opinion on some other factor. These strategies are called delta neutral, and can include things like pairs trading, and arbitrage.

The other sort of trading is on the price chart which trades sideways between support and resistance levels, which if you remember occurs for a significant portion of the time. This in some ways is very clear-cut, as if the sideways movement fails, it will be obvious. The disadvantage is that you may need to trade frequently for typically small movements. If you do not stay on top of the market movements, you may find that the small gains are wiped out by a sudden breakout.

These are the generally used principles that are applied in various ways to develop trading plans. No-one expects, and neither should you, to develop a “perfect” (whatever that means) trading plan right away just by thinking about it, and you need to have a system of feedback as mentioned previously so that you can consider and refine your methods. However, simple can be better, and it is possible to over-engineer plans, making them cumbersome and difficult to use consistently. When you have a working and profitable plan, be very sure that a change will make it better before jumping in.

Before we look at the different strategies, you should consider the other aspects that will affect how you spread bet. Depending how your life is currently structured, you may have ready answers for some of them, and others you may have to think about.

For instance, how much time to you want to devote to spread betting, and is this in blocks of time, frequent short intervals, or what? If you want to embrace the excitement of intra-day or short time-scale betting (and have the disposition to do so) you will have to have a lot of available time, and this probably wouldn’t suit anyone with a regular day job. Many spread betters are more able and comfortable betting on a medium timespan of a few days to up to one month.

Even if you want to bet intra-day, you must also consider your hardware requirements for such fast trading. You absolutely need a fast internet connection, and a good size account so that you do not have a problem funding which you would have little time to resolve.

When you are considering the type of betting you will do, be realistic about your abilities to control your emotions, and what you are looking for in your betting. For instance, if you want to use counter trend strategies there is less leeway for hesitation in entering and exiting the bet than if you follow trends. You should be confident that you will be able to “pull the trigger” whenever necessary without hesitation. Now it is time to look at specific strategies that have worked for others. To avoid getting confused, it is best to concentrate on one type of strategy at first, say the trend-following. Once you have become proficient at it, you can try another, but if the first strategy is working and suits your risk profile, you might not even bother to do that – many traders find that they just focus on one way of trading, and that is all they need.