Perhaps the most common strategy, especially among new traders, is the use of trend direction to determine position entries, known as trend following. Traders look at the underlying momentum in market prices before determining their trading bias.Price activity is generally thought to be in an uptrend when charts (on any timeframe) show higher highs and higher lows (higher peaks and troughs). Without these characteristics a clear uptrend is not in place, but if these higher peaks and troughs are seen a trend follower would view this as a bullish signal and establish a buy position. Conversely, downtrends are seen when prices show lower highs and lower lows. A trader might then sell based on the assumption that the trend is more likely to continue than it is to reverse. Trend following works with any timeframe but commonly suits longer timeframes (daily or weekly) as, once trends are in place, they tend to continue for long stretches of time.
Another common strategy is reversal trading (also known as ‘contrarian trading’). Here traders are looking for areas where trends (either uptrends or downtrends) are over-extended and ready to reverse. Essentially, these traders look for buy entries when a downtrend is seen reversing (and moving higher) and sell entries when an uptrend is nearing completion to the upside (ready to turn lower).Many new traders are reluctant to try this method (instead favouring trend trading) but there are some clear advantages to reversal trading. While reversals can be harder to identify than larger trends, they allow for more favourable entry points (buying low and selling high). By contrast trend traders are entering positions much later, after most of the activity has already occurred. Spotting reversals is a complicated spread betting strategy but, with practice and the use of indicator tools, contrarian signals can lead to much larger profits when successful.
An alternative to these methods is breakout trading, which is a type of continuation strategy where prices are expected to extend higher (in an uptrend) or lower (in a downtrend). Generally, support and resistance levels are identified and traders wait for new highs and lows to be posted before new positions are triggered. For example, when a price breaks above a clearly defined resistance level, you might view this as evidence that an uptrend remains in place and open buy positions based on the assumption that prices will continue higher. The reverse would be true for prices that have broken below significant levels of support. Potential problems with this strategy are the difficulty in placing stops and the fact that it essentially requires traders to ‘buy high and sell low’, of course not the most favourable area for entry. Many traders, however, like the very clear entry levels, which often correspond with high volatility (and therefore greater profits).
The last spread betting strategy we’ll look at is news trading. This strategy is different from the others we’ve described (which rely heavily on technical analysis) as it requires an understanding of macroeconomic data and an accurate interpretation of news headlines. This interpretation can sometimes be difficult (as there are many instances where market opinion is divided on an issue) but, given that price activity is often dictated by economic data releases or positive/negative news headlines, this form of trading can prove to be highly profitable and easy to forecast. Examples of key events are: quarterly earnings reports by corporations; government data such as GDP or inflation figures; or when a geopolitical event is seen having an impact on market activity. You must remember, however, to research the impact of macroeconomic indicators as this is the only way to forecast the market response to different types of news.
Many more spread betting strategies available
The trading techniques described above by no means represent an exhaustive list of spread betting strategies. We have merely summarised the underlying arguments used in the most popular strategies. Most techniques rely on an understanding of technical chart analysis but, as we have seen, there are also strategies for traders looking to use macro data as a way of determining their trading bias. One important point to remember is that these strategies should never be combined for the same trade. The underlying logic for each type of strategy is different (and often conflicts) so all traders must remember that, once a strategy is implemented, the initial logic must be respected and allowed to reach completion.