Spread Betting Volatile Markets

Taking Advantage of High Volatility and Financial Turmoil -:

Trading in volatile markets demands a disciplined approach and there are techniques you can learn to use now that minimise your risk and increase your profits. The key lies in knowing how consistent successful traders research trades and manage them well from start to finish. Whether you trade stocks, forex, or futures, or maybe spread betting, I will aim to show you specific tactics that can be used immediately to spot opportunities and trade them profitably.

A prolonged financial turmoil may mean that there well be a drop in consumer and business spending but this tends to do two things in my view -:

1. Expose the weaker companies, products and services which may falter, collapse or disappear.
2. Reveal the better run companies, with less indebtedness, stronger service/product offerings in markets that will always survive OR can demonstrate and manage a really good sales process/force/marketing/demand.

Extreme volatility in an industry is usually driven by sentiment as opposed to fundamentals. Where volatility is not so high, it may be possible to identify trends; the key is to distinguish a trending market from a volatile one.

These are indeed interesting and very challenging markets…

“So my current philosophy is to sit on my hands for “great” opportunities, and only stir for “extraordinary” ones, fully conscious that this may well mean missing the bottom of the market.”

I think ‘great opportunities’ could equate to ‘value’ and ‘extraordinary opportunities’ equates to ‘deep value’. I too have sat on my hands (they have, at times, tried to squirm out from under my butt cheeks and it’s been difficult to keep them under cheek) and as a result, so far, I’ve not missed the bottom of the market, rather, I’ve seen the markets fall even further revealing even deeper value.

The falling has to end sometime, but like being caught in the headlights when holding and not being able to sell, a similar thing can happen not being able to press the buy button.

These are testing times where nerve and luck is required imo, also it’s a lot of work trying to sort out all the seeming opportunities about – it’s like being a kid in a candy store with a pocket full of piggybank monies.

Note also that getting back into the market is not simply a reverse of exiting. Stocks regain confidence much slower than they lose it. Stocks with sound fundamentals which have fallen with the market will get much more of a momentum bounce than PSR value stocks. When I looked back at Cornerstone & Zweig filters at the 2009 reversal they didn’t do very well for the first few months of the rebound. When everything is a value stock why select the riskier wider spread AIM stocks? It stands to reason that stocks which have held up well will not perform as well as other fundamentally good stocks that have fallen.

‘During times of extreme volatility, we tend to see trade numbers spike. In these periods, clients will often trade more frantically in an attempt to take advantage of the sharp movements in markets so they can make a quick buck. The recent volatility has seen our clients attempt to pick a bottom of the market – but it is very risky, sometimes the fancied markets win every race and the punters make a packet. But sometimes the favourite falls at the first’ – Analyst

Spread Bet Day Trading Tips and Tricks -:

1. Plan ahead. Identify entry levels. Also, plan exit levels in advance should your spread bet move into profit territory or makes a loss.
2. Small cap stocks are generally perceived to be far more volatile than a blue chip.  When prices are highly volatile, spreads tend to widen sharply and quite fast.
3. If you decide to day trade use US stocks rather than UK stocks. Two reasons i.) spreads are tighter (major stocks) and ii.) no stamp duty. Also, you have some guidance from London on day sentiment whether it’s up or down.
4. You can make money on very big movement days if you go with the flow. During volatile times you can pick up on smaller movements of asset movements, when, in more normal times, you may have to wait for a longer and bigger move.
5. No ‘overnighters’. Accept a loss if necessary but always close on the day. Don’t confuse a long term investment with a short term trade.
6. On (3) above the best loss is always the first loss. You can do some ADVFN research on this if you want to, check out the Northern Rock threads when the problems first surfaced and it closed at £4.50 on a Friday night. Someone said that price would look good on the following Monday.
7. Keep your trading pot separate from your main cash/savings/investments and before starting out make sure you are comfortable of losing this trading money with no adverse impact on your day-to-day life.
8. Risk no more than 5% of your trading pot on any one trade. Try to look for trades that offer more than 5% upside. That means if you use spread bets for example you would take say a £10,000 trading pot, punt say £10,000 on a trade providing margin = 5%, i.e. £500. Close the trade if losses = £500 and/or profits = £500+.
9. You also need to accept that your timing will be off more often than it is on – getting the timing right in these markets is often more down to luck than your trading skills. The trick in such cases is to stagger your entry i.e. buying in tranches meaning that instead of buying 5000 stocks at £2.50 you would buy an initial 1000 and then wait to see if you are able to get an even better entry price to buy again.
10. When markets get turbulent gurus sometimes talk about a three legged stool of profit trend, dividend level and asset cover as a minimum for stronger stocks worth supporting. For you spreadbetters I would say the equivalent might be: go for 3 x the minimum stop loss.

I see us going through a cycle – no business or economy can keep growing without any retracement. Whichever instrument you decide to trade do study that instrument’s past history before trading it even if it’s just looking at a chart for the last 30+ years. I have looked up and down the history of the indices for as long as the IG charts go back for which is around 30 years worth of data!

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