How Do I Construct A Trading Bias?

When we are starting out in spread betting, it can be easy to get caught up in the excitement of fast moving markets.  But it is important to remember that no real money should be put at risk unless you have properly analyze the relevant factors that will help you determine which direction the asset is most likely to travel. 

 

This, of course, can be a difficult task and there are many different ways of approaching your market analysis.  The two most common methods (the ‘Ying and Yang’ of spread betting) can be found in technical and fundamental analysis.  But there are some common misunderstandings that are often seen with respect to both disciplines.  Here, we will look at some of the most important characteristics of each approach so that traders can decide which is best to use when looking to determine a trading bias for an active position.

 

Charts Tell An Important Tale

 

For some traders, historical price activity is viewed as largely useless information.  The logic here would be that what is past is past, and this can little relevance or influence on what is likely to happen in the markets going forward.  But for traders that practice technical analysis, nothing could be further from the truth.

 

Technical analysts use price charts to gain an understanding of historical supply and demand levels (often referred to as support and resistance levels).  These are the market forces that cause asset prices to rise and fall, and if you are able to use these levels to determine turning points, substantial trading profits can be made.  Additionally, technical analysts are able to identify times when market pricing has reached extreme levels (become overbought or oversold).  This is another instance where turning points become more likely and positions can be taken in an effort to ‘buy low, and sell high.’

 

Don’t Forget The Fundamentals

 

Alternatively, spread betters can focus on the fundamentals -- the underlying economic factors that are most likely to influence sentiment.  This is a much more traditional approach as technical analysis is mostly (although not entirely) a phenomenon that has been ushered in by the advances seen in computer technology.  In fundamental analysis, the critical factors being watched are going to change depending on the asset that is being watched. 

 

In stocks, for example, a fundamental analyst will need to consider quarterly earnings releases and valuation metrics like the price-to-earnings (P/E) ratio when determine a trading bias.  Are current revenues strong for the company?  Are there any major product innovations in the pipeline?  Is the stock itself trading at inexpensive levels relative to its main competitors?  If the answer to questions like these is ‘yes,’ your outlook is likely positive and your trading bias is likely bullish (supporting buy positions).  If not, it might be a good idea to consider selling that stock.

 

Factors like these will not extend to other asset classes, however.  In currency markets, fundamental analysts would be more likely to watch for major central bank decisions or changing interest rates as a basis for establishing new positions.  There is no ‘corporate earnings’ equivalent in the currency markets so the most critical factors will be different even though the same form of analysis (fundamental analysis) is being used.  Commodities markets trade in yet another environment, with supply inventories and general market demand seen as central basis for investor sentiment.  So for those trading in assets like gold and oil, these would be some of the most important areas to watch when constructing a positive or negative trading bias.

 

Putting It All Together

 

The main point to remember here is that there is no single approach that is right for all situations or all asset types.  In practice, most successful traders will rely on more than one approach depending on which asset is being traded and the volatility environment that is seen at any given time -- and there is absolutely nothing wrong with combining technical and fundamental analysis when constructing a trading bias. 

 

One popular approach is to start with a fundamental reasoning (economic evidence for strength or weakness in an asset) and then combine that with technical analysis in order to find specific trade entry and profit target levels.  In any case, it is important to use at least one form of analysis before entering into any new spread betting positions.  Without this, there is no way to assess whether or not the probabilities are on your side -- and your prospects for success are no better than a simple coin toss.