Technical Analysis

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

As spread betters continue to learn about the broad diversity of assets that is available for trading, we have seen a massive rise in the popularity of currency trades.  Financial trading is not just about stocks anymore, so it is a good idea to have an understanding of how different asset classes operate.  Currency crosses have some differences when compared to stocks and commodities because the value of one currency is always expressed in terms of its relationship to another currency.  In other words, a currency has no intrinsic value.  Any definable value will always depend on the secondary currency in the cross.

Reading A Forex Quote

Chart Example:  EUR/USD


Let’s start with a chart example in the EUR/USD.

What information can be seen in the chart above?  Since the Euro is the first currency in the pair (the base currency) and the Dollar is the second (the counter currency), any upside moves in the chart would should strengthen in the Euro and weakness in the Dolla

The chart shows the Euro valued at just under 1.25 per Dollar.  We can see that prices rising steadily through May of 2014, only to fall sharply in the following months.  This means that the Euro was in control until roughly the middle of 2014 but then started to show significant weakness shortly

Stock trading has been around forever but sometimes it can be difficult to construct a bias for whether or not a given company is currently overvalued or undervalued.  One of the ways stock traders tackle this problem is to analyze the most commonly watched stock metrics.  Common examples here include price-to-earnings, return on investment, earnings per share, and compound annual growth rate.  Here we will look at what goes into each of these calculations to determine how they are used when generating new ideas for stock positions.

Price-to-Earnings Ratio (P/E)


When we look at some of the common problems that are typically encountered by spread betters (of all experience levels), improper position management often comes in near the top of the list.  In many cases, a trader will conduct the initial market analysis, set a profit target and stop loss, and then move onto the next trade.  This type of approach has become even more popular with the rising popularity of automated trading software.  But it is important to remember that trading is never this simple, and spread betters can limit many potential losses by taking the time to monitor the changing conditions of the market after the initial trade is executed.

Managing Negative Positions


When spread betters discuss their daily market activity, the majority tends to focus on one of the major asset classes:  stocks, commodities, or forex.  There are some advantages to this approach, as it will allow spread betters to really become an expert in a given area.  It will also become much easier to spot opportunities when they occur because you will have a much better sense of when a certain asset has become overly cheap or expensive.


But one thing that gets missed when spread betters focus on one asset class alone is the fact that each of these asset classes are deeply connected.  Having a better sense of the ways these asset classes are connected can make it much easier to identify emerging trends before they happen.


Dollar-Denominated Assets


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.


Stock Events


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.

Trend Indicators


Over the last few years, forex trading has surged in popularity.  But some of the terminology can seem difficult to understand.  Here we look at the pip, and define its place in a broader trading strategy.

Forex Markets:  The Basic Units


When we think of spread betting, stock trading is usually the first thing that comes to mind.  But it should be known that not all stock trading involves buying stocks.  Short selling gives spread betters the opportunity to profit from declines in stock valuations, so this is a strategy that should be considered whenever the outlook for a given company starts to deteriorate.  To be sure, most spread betters specialize in either long or short positions.  But there is nothing wrong with using both approaches as part of a broader strategy.  Here, we look at when a trader should be looking to buy or sell a company’s stock.

Long Positions -- The Bullish Stance


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


There is nothing used by technical traders that is more metaphysical or “astrological” than the Fibonacci sequence. The rationale for why many of these calculations become relevant is truly mind-boggling to many, myself included.

The price wave is measured from roughly 1.4200 to 1.6000. This is about 1800 points of movement, so if the price falls 900 points, to about 1.5100, we will have a 50% Fibonacci retracement. As a general rule, we would expect support to come in at these typical percentage levels.

The last example is the Fibonacci “time zone,” which is plotted with vertical lines. The chart is divided into segments based on the Fibonacci sequence.

Many traders use the Fibonacci levels created by some of these methods as the primary rationale for trading ideas. But it is important to remember that a successful trader will almost never use a single method as an argument for entering a trade.

Indicators are chart calculations that measure the strength of price trends, volatility or momentum. Most traders look at these indicators in conjunction with moving averages and support and resistance levels to determine whether or not high probability trading setups are being formed.

The above example uses the Relative Strength Index (RSI), which is one of the most common indicators used by traders. RSI is a momentum indicator that shows overbought/oversold conditions, plotted in a range from zero to 100.

RSI generally uses 14 periods as its reference point but the MACD lines are based on information gathered from the previous 12 and 26 exponential price intervals. Remember that “exponential” essentially means that recent periods are weighted more heavily.

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.

Generally, traders have four choices when choosing the type of chart to watch when conducting technical analysis of an asset. These include line charts, bar charts, candlestick charts and “point and figure” charts.

Bar charts add information by showing vertical lines as each interval. The top of each line is the high of the period, the bottom is the low. Short horizontal lines are added, which show us the open (left horizontal line) and the close of the interval (the right horizontal line).

The candlestick chart is a slight variation of the bar chart. The vertical “wick” shows us the high and low of the period. The body of the candle shows us the open and the close. The color of the candle allows us to quickly understand how prices behaved during the period.

Point and figure charts are much less common today. These charts do not show volume (relevant for stock traders) and aim to remove the impact of time and periods of consolidation. Today, most traders rely on candlestick charts to construct a trading bias.

“Technical analysis” is the term used to describe the methods traders use to identify overall market trends and potential trading setups, based on an asset’s price history.

When trying to make an analysis of the value of a security, there are two general approaches most investors use: Fundamental Analysis and Technical Analysis. A “fundamental analyst” looks to understand the characteristic qualities present within a company or other tradable asset.