These ten top tips for spread betting are from Malcolm Pryor.
1. Stay the right side of the 200-day moving average
Research by Larry Connors, amongst others, suggests that staying the right side of the 200-day moving average can provide an edge for traders holding a spread bet for more than a day. Don’t go short if price is above this average, don’t go long if price is below it.
2. Respect the trend
Many spread bettors can improve their performance by only taking trades in line with the trend. There are many tools that can be used as trend filters, for example the slope of a moving average or the ADX indicator being above a given cut-off point, such as 25.
3. When position trading stocks, respect relative strength
If you trade stocks and hold them for a few weeks there can be an edge in going with recent relative strength relationships. If going long, look for stocks in sectors that are out-performing the overall market; if going short look for stocks in sectors that are under-performing the overall market.
4. Know your exit
Before you enter a trade know where you will get out of the trade if it goes against you. Use technical analysis to help determine that point by making sure stops are below support if going long or above resistance if going short.
5. Check the distance between entry and stop loss
Check that the distance between entry and stop makes sense using the Average True Range tool; don’t put stops too close. For instance, if planning to hold a trade for five days stops that are only 1 Average True Range away are at risk of being hit just through market noise. Try 1.5 or 2.0 Average True Range as your stop size.
6. Remember that support and resistance levels are not facts
Support and resistance levels tend to be zones rather than exact numbers and they don’t work forever. By putting stops the other side of them we are only trying to put probability on our side, not certainty.
7. Think in terms of batches of trades, not individual trades
A successful trader is indifferent to the outcome of any individual trade because if that trader has an edge it will be demonstrated over the course of a sequence of trades. The minimum number of trades required to suggest that an edge exists with a statistical significance is 30.
8. Don’t rely on oscillators
Many spread bettors place too much reliance on oscillators such as RSI and stochastics. One of the best ways to use such oscillators is to look for divergence between price action and oscillator action on a short time frame to identify entry points to join a trend on a long time frame.
9. Use Bollinger bands to determine relative highs and lows
Bollinger Bands provide valuable information about relative highs and relative lows. Several strategies using Bollinger Bands are documented by John Bollinger in his books and on his websites.
10. Utilise Pivot Points to find upper and lower limits of price action
For day traders Pivot Points provide useful reference points for potential upper and lower limits of price action, particularly on days where there is no clear unidirectional movement.