Traders that base most of their spread betting strategies on technical analysis will need to become more familiar with the terms ‘trend’ and ‘reversal.’ These are two of the dominant price movements that are used to define the broader activity that is seen in an asset. There are viable trading strategies connected to both scenarios, so it is a good idea to understand how these structures work and operate so that you know what to position for what is coming next.
Downtrends and Uptrends
Spread betters use these trends to identify the dominant price direction that is seen in an asset. When prices are in an uptrend, you know that the majority of the market is bullish on an asset (or bearish in a downtrend). This is valuable information because you will be able
Spotting reversals is easier said than done, however. Specifically, spread betters need to find situations where the rules for a trend become violated. For uptrends, this would mean that the asset is no longer posting higher lows and higher highs. For downtrends, this would me
Short sellers might be ready to enter the market once the series of higher highs and lows is ending. But when we add an indicator reading, it becomes easier to turn the odds for success in our favor. In this example, the MACD indicator is falling into negative territory just as the uptrend line
These days, many spread betters rely on technical analysis as a means for implementing new trade ideas. But even in cases where a trader will base entry and exit levels on this approach, it is a good idea to at least remain cognizant of when market-moving economic events are likely to occur. This can help you to avoid setting positions during time of increased volatility and erratic changes in the underlying market trend. One of the best strategies here is to consistently watch an economic calendar, as this is the best indication of the times when the market is likely to be jolted by new information.
Once you have made the rounds and done your research to gain an understanding of some of the most commonly used technical indicators, it is important to start focusing on strategies that will allow you to maximize your gains and spot the highest probability opportunities present in the market. One of the best ways of doing this is to use more than one technical indicator at a time. Combining indicators can help spread betters to separate your trades and become more selective before actively pulling the trigger and putting real money on the line.
But which indicators should be combined? Unfortunately, there is no direct answer here that will work for all trading styles. But the important thing to remember is that the indicators you chose should come from different categories, as doubling up on similar indicators will not really give you any new information. It will also not go far in helping your probabilities for success. Here, we will look at the main types of indicators so that spread betters know which indicators are most compatible when defining a trading strategy.
As a general rule, before any trades are placed, entries, profit targets and stop losses should be clearly defined prior to execution. A “stop loss” is the point at which a trader is willing to accept defeat and exit the trade at a loss.
Based on this chart, how would you structure a trade? Support for this asset clearly comes in at 1.5300. This is our buy area (the trade entry). Resistance comes in solidly at 1.6000. This is the profit target for long positions (or, conversely the entry area for short positions).
When we talk about chart patterns, we are referencing structures in price formation that will give traders clues about the future value of an asset. Some patterns suggest that trends will continue while others signal potential reversals.
In this example, a short trade would be triggered once the Neckline support is broken. The bottoming formation would show an exact inversion of all these scenarios. Below is an example:
Another formation that is also very reliable is the occurrence of Double or Triple Tops and Bottoms. This is also a reversal pattern, as it contains levels of support or resistance that have been tested multiple times without being broken.
And here is a potential Sell signal created by a Double Top:
In this case, a Sell trade could be placed close to the 1.0745 area with a stop-loss above that level of resistance.
This pattern is unlike many of the others in that it is a completely neutral signal until one of the trendlines break.
When looking at a descending triangle, we see the lower support trendline that is flat and an upper resistance line that is descending. Traders see this as negative for the asset involved but confirmation is needed, which is signaled by a break of the flat support line.
The last of the major chart patterns that we will look at here are the Flag and Pennant patterns. These are examples of trend continuation patterns which show prices sharply moving in one direction, followed by a period of sideways consolidation.
We can see the differences here, in the Flag pattern below (buy signal):
The main similarity in both of these patterns is that prices are expected to continue in the direction of the impulsive move (either up or down) after the period of sideways consolidation breaks out of its symmetrical triangle or sideways channel.
Over the lifetime of an asset, price valuations can vary significantly. In most cases, traders use tools to help consolidate and simplify those changes using moving averages. This is a very simple concept.
The most common time frames that are used when traders add moving averages to their charts are the 200-day, 100-day, 50-day, 20-day and 10-day.
Moving averages are useful for a multitude of reasons. In addition to providing a consolidation of historical price activity, they provide a simple method for determining whether prices are trending up or down.
Notice how the signal predicted a sharp upward movement. Would it have been easy to anticipate that move without looking at the averages? This would be unlikely.
One of the most useful methods of determining which trade will eventually be successful relies on the identification of underlying trends. When we talk about trends in Technical Analysis we really mean nothing more than the general direction of the asset price.
Lower highs and lower lows would give us a downtrend:
Sideways trading without either of these characteristics would give us a range-bound market:
The charts in the pictures above are relatively clear examples of market direction. But, often, the charts will not be so clear. Additionally, there can be conflicting information, depending on the time frame for a given asset.
Drawing trendlines on a chart in this fashion will enable us to look at the chart in a more focused way and allow us to begin forming arguments for which trading bias (Buy or Sell) is most likely to bring positive results.
One of the most common phrases in Technical Analysis is the idea that “the trend is your friend.” What is meant by this is that the dominant trend, for the most part is expected to continue and is not something that should be fought against.
The terms “support” and “resistance” are two of the most common in the lexicon of technical trading. Essentially, they refer to the price levels marking areas where, historically, buyers have entered the market (demand, support) and the areas where sellers have dominated (supply, resistance).
These price areas are important for two reasons, one practical and one is psychological.
The reasoning for this occurrence is the idea that supply and demand have shifted for the asset that is being traded. In a region of resistance, once selling pressure has been overcome, those sellers will be forced to bail out on their trades. A seller exiting his trade becomes a buyer.
Last, we will look at some notes of caution. Using the 0.9850 level in the Aussie Dollar as an example we should consider which areas would be dangerous in terms of placing a trade entry.