What is a Spread Betting Strategy?
Let’s look at answering the question of ‘What is a Spread Betting Strategy?’. Quite simply a strategy is a set of rules that you follow to manage all of your spread betting and trading. The spread betters that make the most money usually have one thing in common; a specific strategy that sets out each aspect of their trading activity.
Most traders have different needs and different styles for meeting those needs
Spread betting strategies are as varied as the number of traders working in different market environments. Most traders have different needs and different styles for meeting those needs. Luckily, there are lots of well-researched trading methods tailored to each type of spread betting strategy.
Because of this putting together your strategy can be quite difficult. There are lots of charting tools, methods and technical indicators out there so it is difficult to know where to begin. However, from the traders we speak to there is usually one common theme that simple strategies are usually the most effective.
One common theme is that simple strategies are usually the most effective
You can create profitable trading strategies using a few technical indicators and looking for certain market conditions. We would really recommend picking just two or three indicators and also become familiar with how to recognise certain market conditions. Once you know them inside out, you can then start to build a strategy from there.
Here we will cover the basic ideas of each of the core strategies in spread betting and summarise how each may lead to financial gains. This is by no means a full list of potential strategies but these are the most popular strategies in a spread betting trading environment. We will look at;
- Trend Following
- Reversal Trading
- Range Trading
- Break Out Trading
- Trading the News
Trend Following
This is probably the most popular method used by spread bettors and traders. It is essentially use of trend direction of a market to help determine position entries, this is known as trend following. With this method traders look at the underlying direction or momentum in market prices before determining their trading bias i.e. long or short.
Price activity is generally thought to be in an uptrend when charts show higher highs and higher lows. Without these characteristics a clear uptrend is not in place, but if these higher peaks and troughs are seen many traders would view this as a positive signal and establish a buy position.
Downtrends are seen when prices show lower highs and lower lows. When prices meet this condition a trader might choose to enter a sell position based on the assumption that the trend is more likely to continue than it is to reverse. You can perform trend following methods on any time frame but they commonly suit longer timeframes (daily or weekly) as once trends are in place they tend to continue for long stretches of time.
Reversal Trading
Another popular strategy is reversal trading. With reversal trading spread bettors are looking for potential areas where trends (either uptrend or downtrend) are over-extended and ready to reverse in the opposite direction. Essentially, with reversal trading you are looking to buy when a downtrend is seen reversing (and moving higher) and sell when an uptrend is nearing completion to the upside (ready to turn lower).
There are some clear advantages to reversal trading not found with other techniques
There are some clear advantages to reversal trading not found with other strategies. It is often said that reversals can be harder to spot than larger trends, but reversals allow for a better entry points (buying low and selling high).
By contrast pure trend traders are usually entering positions much later. Spotting reversals can be a complicated spread betting strategy but, with practice and the use of some technical indicators much larger profits can be gained. There are many different types of reversal patterns but one of the most common is the head and shoulders pattern.
Range Trading
Now let’s move on to range trading, which actually inverts the logic of trend-based strategies. Here, support and resistance levels are identified (previous levels where buyers and sellers have entered the market) and traders base position entries on the assumption that these levels are significant in market psychology and will continue to hold in the future.
Spread bettors using this strategy will take buy positions when prices are approaching support and sell entries when prices approach resistance. This can be a good strategy for new spread bettors as it allows for easy stop-loss placement. Stops can be placed just outside of the trading range, as a break of these levels would signal that the range is no longer valid or is looking to “break out”.
Breakout Trading
An alternative to all of the strategies mentioned so far is breakout trading.
This 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.
Many spread bettors prefer breakout spread betting strategies because they allow for very clear entry levels.
For example, when a price breaks above a clearly defined resistance level, traders will 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 the strategy are the difficulty in placing stops and the fact that the strategy essentially requires traders to ‘buy high and sell low’, which of course is not the most favourable area for entry. Many traders, however, prefer breakout spread betting strategies because they allow for very clear entry levels, which often correspond with increased volatility (and therefore greater profits).
Trading the News
The last spread betting strategy is trading the news. The key difference with this strategy is that is does not rely on technical analysis as the other strategies did. Trading the news requires an understanding of macroeconomic data and an accurate interpretation of news and economic headlines.
This interpretation can sometimes be difficult as market opinion is often divided on an issue. However given that price activity is often dictated by an economic data release or positive/negative news headlines, this form of trading can prove to be highly profitable and easy to forecast.
Traders must remember to research the impact of macroeconomic indicators
Examples of key news events are the release of quarterly earnings reports by corporations or government data such as GDP or inflation figures, or when a geopolitical event is seen having an impact on market activity. Traders 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 story.
Conclusion
There are many different spread betting strategies out there. However, if you keep in mind the main groups of strategy then you can build on this with you own ideas and also look at what other spread betting traders do. We are also putting together our own strategy sharing area, so check out what other traders have shared and share your strategy with us too…
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