One of the most popular strategies for traders, particularly in the early stages, is known as ‘scalping’. A strategy which seeks to minimize risk, the theory behind scalping is that by closing financial spread betting positions quickly and taking small gains when they present themselves, the trader is less exposed to downwards fluctuations in price and can build up a profitable pot over time with many smaller trades.
The main advantage here is the preservation of capital – by scalping individual profits of a few PIPs as they arise, the trader is banking a profit at every turn with a view to creating a stable stream of income and increasing capital throughout a trading day with minimal downside exposure.
Obviously, the main strength of scalping is also its main weakness, and less disciplined traders may quickly get frustrated at closing positions that turn out to deliver hundreds of PIPs in favour at such an early stage. However, for the risk-averse trader, and particularly for traders that are new to the game, trading on this short-term multiple basis is a good way to get started without jeopardizing their capital amount.
Likewise, scalping requires almost constant engagement throughout the trading day if you’re looking to make any significant level of profit, constantly opening and closing positions in response to the market and incorporating the comparatively expensive trading costs of such a strategy in the process. Compared to longer term trading, this can be quite stressful, and requires a constant hands-on approach which might not be suitable for every spread bettor.
Trading on market trends is another common trading strategy used by spread bettors, who jump on a market bandwagon after a combination of factors are triggered and effectively ride the wave of price movements. This takes place over the course of the trading day rather than a few minutes (as with scalping), and renders transactions costs minimal while presenting potentially wild gains.
The perfect scenario for trading on trends appears when an announcement is made or a news story breaks and the markets just begin to react to that announcement. While the first few minutes can be a volatile period, identifying the start of a price trend in either direction can give the trader a clear indicator of which position to adopt, and takes advantage of your individual dynamism over larger funds to adopt savvy but early positions. In contrast to scalping, this kind of strategy allows you to open a position slightly ahead of the rest of the market, to capitalize on the potentially significant reaction of an index price as the market moves on-trend.
Of course, this is just the second potential spread betting strategy, and there are countless others and variations that traders can implement. Ultimately, it is up to the individual trader to determine what works best for them, but devising a solid trading strategy remains a key element in profitable, consistent spread betting.
Reversals trading involves analysing, with recourse to graphical performance data, the point at which a market or index is likely to reverse based on perceived over- or under-pricing. When analysing the performance of a market over a recent period, it should become apparent as to where the upper and lower limits of the index have been. As a market or share approaches either of these limits, reversals trading strategies advise that you keep an eye on the index movement and prepare to pounce at the first sign of reversal, capitalizing on the gains made over the course of the price correction.
Reversals trading is particularly popular in that it is a reactive, low-risk strategy that doesn’t attempt to second-guess, but more moves in line with market reactions. Compared with other spread betting strategies, this means its possible to ride the wave of a price correction without having to come in ahead of time, minimizing the potential for losses whilst also reaching a happy medium in terms of the gains achievable.
Trading break-outs with spread betting can be a great way to capitalise on strong price movements, and it is often possible to predict where a price is preparing to rocket through its previous boundaries. Spread bettors using this kind of strategy will wait until an index breaches its previous upper limits, usually for two or more successive days, giving an indication that the market is particularly and unprecedentedly bullish, and the price may be about to rise (similarly it can be done for a bearish market when an index (or any other asset) breaches its previous lower limits).
When trading shares through such a strategy, you would ideally position a stop loss at the pre-existing upper limit to counter the impact of a failed price break-out, but as a reactive strategy (i.e. the index is already moving favourably when the bet is placed), the downside risk is limited only to situations where the index has been overly-inflated – by which time, the trader will look to have locked in his profit and moved on to another trade.
Casting your eye over the tried and tested spread betting strategies is an important and effective way of improving your consistency and developing some structure in your trading. While it is not always possible to guarantee success through a particular strategy, or even through a combination of strategies, it’s a good idea to devise a system that works for you over the long term to deliver more frequently profitable spread trades, and to stack the odds more in your favour than with a disorganised, scattergun approach.
Trading as a spread bettor is an intricate and involved process, and all too often the novice trader simply doesn’t understand the workload and effort involved in getting it right. With so much going on around the world markets on a second-by-second basis, it can be difficult to keep up to date with all the different variables factoring in to the equation, and traders often fall back to rely on graphical analysis methods to alleviate some of the burden. Graphical methods are a surprisingly accurate way of trading market behaviour, given the cyclical nature of most world markets, and as a result it can be possible to use simple graphical analysis to devise effective trading strategies.
One such method is known as tramline trading, and requires a simple exercise in joining the dots. Looking at a graph for a market over a particular time (which should be easily achievable within the confines of your current spread betting platform), you will notice a number of turning points where the market moves from and upwards to a downwards slope, and vice versa. Look at each of these points in turn.
Now look at the graph as a wider picture. When you look at graphical data the first few times you appreciate that is looks confusing and hard to interpret, but it actually presents extremely useful information, allowing you to establish virtual tramlines in which you can more effectively position your trades.
Firstly, look at the overall trend of the highest price points over given cycles. Is the market rising or falling overall? This should be apparent from looking at the gradient of the graph – does it go up or down?
The next step is to look at where the turning points sit on the upper part of the graph. If you can link these points with a straight line sloping either up or down you have the makings of a tramline trading environment, whereby two parallel connecting lines can be drawn between the resistance and support levels of the market.
These lines will represent the points at which the markets are pressured into reversing, either because the market becomes over or underpriced. In a nutshell, the strategy then is to buy when the market turns at a support level and to sell nearing the point of resistance, taking advantage of these organic market pressures to make your profit.
What is striking is how well the markets actually adhere to their own unwritten rules in this regard. Markets are driven largely by institutional investors with too much to lose by getting it wrong. As a result, they tend eventually towards rational decisions, with fluctuations on either side being pulled back and reversed over time. This gives markets their natural cycles, which allow shrewd traders to capitalise.
Trading through the parameters of tramlines is a particularly effective strategy for spread bettors, allowing the capitalisation on large price swings through a leveraged trading method. By implement a strategy based on trading resistance and support levels, supported graphically by the identification of tramlines, it is possible to pick better, more profitable trades more consistently.
Find Your Spread Betting Strategy. Don’t try to look for the best strategy out there, use your own criteria and research and find the strategies which work for you and your circumstances. Trading strategies can be short and long term so you have to evaluate your time and see for yourself how much time you want to contribute to financial spread trading.