What Is Spread Betting and How Does It Work?
Hey, a very warm welcome to the course, first of all the mandatory and sensible disclaimer because spread betting is very risky: as is forex trading
You’re taking on risk, a lot of it, no advice or recommendation to trade is given in this course it’s just me just sharing my knowledge, it’s just for information only, educational purposes only, I am not advising you to take any specific trade or do anything specifically.
There are no guarantees to any success some people are very, very, successful spread betting some people aren’t, it’s the same with everything in life. Please only risk what you can afford to lose, if you do decide spread betting is for you then please start on a demo and then if you are going to trade with real money, trade a very, very, small amount and grow your account in that manner and also be aware that it is possible to lose more than your initial investment. Under certain circumstances you can lose more than your deposit, so please understand exactly the risk you are taking when you are placing trades.
And finally just be aware of some brokers but we will go into that in more detail later on and I will guide you as best that I can.So let’s start out with spread betting foundations, what actually is trading? How does it work? This is the fundamental basics. If we understand how something works then we can build from the ground up and this is what this course is all about. The whole course is about adding layers of foundation, building slowly until you get to a point where you have enough knowledge to go out there and spread bet yourself.
So how do traders make money?
Well first of all, traders make money by capitalising on market oscillations and when I talk about a market I mean something like the German Dax, something like the U.S. Dow, something like crude oil, gold, silver, or a stock. It could be a stock like apple, it could be a UK share, like Marks and Spencer.
Traders make money by buying and selling at a higher point and that is called going long or they sell and they buy back lower – going short. So whichever way the market is moving they are attempting to capture those moves.
Now there are different types of trading, you have got scalping which is very small, quick profits from the market, so you are in for maybe a few minutes, even a few seconds and you are grabbing small little profits and you are in and out very, very, quickly, a very intensive way of trading that can be very profitable.
Then you have got standard day trading, so that’s basically trading in and out of a market or several markets many times a day, so you might be watching the Dax and the Dow, you might be watching gold and silver, you might be watching a handful of shares and you are trading in and out of that market during that day, going home flat at the end of the day and starting afresh on the next day and just looking to capture those moves intraday.
Swing trading is a little bit longer term, so, you are taking a trade during the trading day and you are looking to hold that over perhaps a period of a few days, maybe a few weeks, maybe a few months, depending on how you are defining swing trading and then obviously investing is buying for the long term but we are not interested in that in this course.
What I want to talk about in this course primarily is day trading scalping is a little bit finer, it’s a little bit of a finer art. However, a lot of the strategies I talk about later in the course is very valid for scalping and it is going to reduce it down to a smaller time frame. Similarly, with swing trading you can just use the same strategy but on a longer time frame but we will go into all of that detail throughout the rest of the course, but all we need to know now is that there are three types of strategy, generally speaking and to how you can approach spread betting.
What Moves A Market & What Determines, Decides Price
OK, so what moves a market? How do we determine the price of that market? Now basically markets move on supply and demand, it’s that simple and I want you to remember that concept because as we start to introduce more advanced concepts, techniques, charts, chart patterns and strategies, ultimately, they all come down to one thing, what is the supply of the market you’re trading and what is the demand? Regardless of the time frame you are trading.
It is very important to remember that when you are growing as a trader.
OK, it is an auction process, so it’s a buy and sell, traders are buying, traders are selling. Let’s say that you’ve got a green apple and you are looking to sell that apple and you start off at a pound, no one wants to buy, you bring it down to 60 pence, no one wants to buy it, suddenly you bring it down to forty pence, I come along and say “yep, I’ll buy that apple off you”, I buy it from you for forty pence, a trade is done, the price of a green apple is forty pence, that is the official price of the green apple if we are trading on an exchange and it is the same as an auction process, it moves up, the price moves up and down to draw in buyers or sellers.
You may have multiple buyers looking for that green apple and if you offer it at one pound and someone buys it straight away, you maybe have a box of apples, then you offer the next one at two pounds, someone buys it straight away, the next one at three pounds and someone buys it straight away, all of a sudden you are up to ten pounds and that becomes too high. Then you start bringing it down again and you can see how that develops a price for whatever instrument you are trading.
Now markets trade on a centralised exchange, for example the London stock exchange, The New York stock exchange, the NASDAQ, Nymex etc., we can go on. Basically it means that anyone that is part of that exchange is pre authorised to trade, so, you know that the point of having exchanges is that you know that the other side of the trade, is taking, the person at the other side of your trade or should I say the counter party, is qualified to pay for that trade, he has enough money to pay for the insurant you are selling and vice versa, so it brings a little bit of regulation to what you are trading. Forex doesn’t have a central exchange as such apart from Forex Futures but that is something different but it is price based on a group of banks and they trade with each other and that interbank price or the quotes that you get from all these bank are grouped together to give you a price, because it’s a spot currency and it is just transacted slightly differently from other things, we don’t have that centralised exchange but we still have a price that everyone kind of works with.
So, spread betting companies, take that price or from the market and they offer it up as a spread bet, so basically they will create a mirror from what is happening on the exchange and then offer it as a spread bet, we will go into that in a little bit more depth in a second. So who are the players and participants? Well this is really important to understand who is involved with it and who we are trading against. First of all the big guys, the institutions, they are the banks, the hedge funds, the pensions, the mutual funds, anyone who is moving multi billions around. You know, they are not obviously not going to be scalping, they are not going to be day trading, they are going to be positioning, either investing, putting their money in and pulling it out when they want to change from one stock to another, or they are going to be, if they are hedge fund, maybe they have got some of deeper strategy involved in, so, those are the guys who have the BIG money and they are the guys who move the markets.
When we have one or two institutions involved nothing much is going to happen, when everybody or a lot of institutions start moving in one direction, that’s when we get our BIG market moves.
OK, the second players and I am just generalising here guys as you can probably appreciate, is retail, so that to me, includes small trading firms, so guys who have got maybe less than 10 million on accounts between some traders. It includes independent traders like you and I, it includes bigger traders, smaller traders and includes some investors who are maybe just buying for the longer term and aren’t particularly day trading, so, generally small, we haven’t got the ability to move most markets, some small markets perhaps but if we are talking about the bigger markets like the Dow, the Dax and currencies, no chance. So we are the little fish in the big pond.
So HFT are what are called High Frequency Trading algorithms, I kind of bunch these together with algorithms because I wanted to separate them out from the institutions and retailer, of course they are run by institutions generally BUT they have a different goal to their trading, they are looking to scalp small price movements, or, they are looking to arbitrage things off, they are looking to do some little sneaky strategies or whatever. Now, they are in the market, they need to be, we need to be aware of them and often they are going to cause a big market move when they are caught on the wrong side, but, let’s not get too caught up on them, a lot of traders get caught up in them and blame them for certain things, when in reality, it is just the modern market, let’s accept them and let’s move on.
We are not going to dwell on that too much.
What Moves A Market, Who Are The Players, Understanding Supply & Demand
So what moves the market?
We’ve talked about the players. Now, a person buys because he thinks the market is going to go up, that is pretty obvious, however, what isn’t obvious unless you think about it is that for a market to go up someone has to buy after you have bought, causing it to rise. Now it is not quite as simple as that because for every buyer there is a seller. So for a market to rise buyers have to become more aggressive than sellers, they have to pay a higher and higher price, causing the market to go up. If you think about the apple analogy that we had, for every buyer there is a seller, so the market is going nowhere if the demand is very equal, however if the buyers become more aggressive and are prepared to pay more and more and more, that is when the price of our apples or market goes up and you can see with this kind of see-saw analogy that we have got, when the supply is heavy i.e. there is a lot of supply of stock a lot of futures contracts or a lot of currency or whatever is being sold and the demand is low, the price is going to get pushed lower. Vice versa if there is a lot of demand for the product, is there is a lot of demand for wheat, a demand for corn and there is not much supply there, price is going to get pushed higher.
So, market moves go hand in hand with volume, if 100 shares trade at 201 pence or even five million shares trade at that same price, the price is still 201 pence. Back to the apple analogy if I brought one apple from you the price is the price we transacted at, if I buy one thousand apples from you, the price is the price we transacted at. It is an important concepts to understand because if supply is equal to demand regardless of volume the market is not going to move.
Ok, there is a million apples supply and a million apples demand then we have met the demand with the supply and it is not going to move and we get that balance, the see-saw is balanced, supply and demand is equal, we are not going anywhere. However if we have a massive supply or demand imbalance, so we get an out of balance situation, that presents the opportunities for traders and that is well worth remembering because that is when we get our very, very, very, best trades. A million apples coming in, one buyer, you can bet anything, the price of those apples is going to be the lowest it has ever been and vice versa, you have got 10 apples and you have got 100 people who want apples,100 people are prepared to pay any price for those apples. You wait and see that price absolutely fly.
Ok, so, you know we look, as traders, we attempt to spot these imbalances in supply and demand to create that trading opportunity and note that that is the difference between gambling, gamblers trade on hunch, traders look to identify an imbalance in supply and demand and capitalise on it. OK, to do this we use tools like charts etc. to help us make decisions.
Now, I want to run through an example here of how the market moves, now we have used the apple analogy but let’s use a new analogy, based on actual price. So let me run through and get my drawing pad out to show you a little bit easier, so this terminology, don’t worry about it for now, just like me explain it to you. We have got the bid here and we have got me ask ok so this side here are all buyers lined up to buy and this could be anything let let’s call it the price of one share of apple stock, right so that is one share of apple stock. Ok, so it could be anything, it could be a contract of crude oil which is one thousand barrels, it could be anything, ok, justone share. Here we have got the price that different buyers are prepared to pay for that, 100, 99, 98, 97, 96, 95, and here we have got the size so at 100 we have got someone here who wants to buy 20 shares at 100, someone here wants to buy 99 shares at 15, etcetera, etcetera, going down to the last guy who is only prepared to pay 95for his shares, 95 pence and he wants to buy 30 shares at that price.
Ok so obviously if a seller came in now he would sell his first 20 shares to that guy at 100, sell his next 15 at 99 etc. so it is a price of priority and then it goes downwards like that. On the other side we have got the ask side and these guys are all the guys who have got shares to sell. So this guy has got 20 one shares to sell at 103, 31 to sell at 102, 25 at 103 and 20 shares to sell at 104 and there is no trade happening at the moment because the best highest possible price in the world at the moment for this share is 100 pence and the best possible price or the lowest possible price that a seller is willing to sell it at is 101, so we have no trade done at the moment but this is a market and this is the order book, this is how a market is created.
So let’s say now somebody comes along and he wants to sell some shares, he has got a couple of choices, he can either stick himself in at 101 and say well I am prepared to buy, to pay 101 but then the size will increase or he says you know what I just want to sell to that guy at 100. I am going to sell my 20 shares, I have got 20 shares to sell and this guy wants to buy 20, I am going to sell them to him.
So then a trader occurs, he sells 100 shares, this guy here buys them, you have sold your 100, the price is 100and the order book then looks like 99 is the best bid or the best buying price, 100is the best selling price and this is what you can imagine here now if someone came along and suddenly swept the book and sold, I do not know how many that would be but if he sold 50 or 100shares or so then what happens is, is the book gets swept, he takes 20 at that price, he takes 15 shares at that price, he takes 45 at that price, he takes 32 at that price until his whole 100is filled and then other sellers will come in and you will start to see this side get filled up.
So not getting too caught up on that but just understanding what moves price, price moves up a little bit, price moves down a little bit, going for supply and demand and when buyers and sellers are matched that’s when we get a trade.
The History of spread betting
Ok so a really quick history lesson I know it’s boring but it’s sometimes a little bit interesting to see where things have come because it might give you an idea of where things are going to go.
So, spread betting started in 1970, in London, as a way for the city guys and girls to bet on the gold price without actually owning any bullion. A guy called Stuart Wheeler started the whole thing, he decided to make a spread, he invented this product and it meant that people could take bets on the direction without having to buy the actual thing and that really took off. Between 1980 and 1990 more companies appeared offering it and obviously more markets appeared. It was very much a city workers type thing and then it started to appeal to more mainstream, the man on the street who wanted to bet on the price of a share, who wanted to bet on the price of an index, he wanted to bet on the price of crude oil without actually owning a thousand barrels of crude oil. So it became quite a good way of getting exposure to something that you wouldn’t otherwise be able to get exposure to.
Obviously it started out with telephone orders back then, you would ring up your broker and ask for a quote and when I started trading back in 2001 in the UK this was kind of where we still were and it moved slowly to one line, a little story about that in a second but you would ring up and you would state your name, your account number, obviously if you were a high turnover client they would know you, you would have a direct line, you would ask for a quote and you would get a quote and you would buy, he would repeat the order to you and the phone would go down, so obviously that is quite labour intensive but that is how it was in those days.
And actually as we developed a little bit, a little brief story, as we developed, the broker I was using at the time, by the way, at the end of it guys, I will give you a link to some of my preferred brokers and I will be changing those if they ever step out of line and don’t do anything, so it is a good link to put in your bookmark so you can see exactly who I use and the tools and resources I use.
Anyway, this broker who I actually still use now and how I did back then, he, or they should I say started an online application but really it was just a messenger system, let’s say he had the FTSE up and you would click it on the screen and all it would do, it would automate, so you would have a little button here that said basically, “buy” or “sell”, so you had this kind of button under the market you were trading, so let’s say it was the FTSE, so I would come along and I would say OK, so I want to buy, so I would click this button and a little messenger window would come up and a man or a woman would type in “the quote for the FTSE is four thousand to four thousand and five and of course I will explain all this spread in a second, and then you would type in, a little button would pop up and you would type in “I would like to buy ten pound a point there” and then it would go.
So basically it was just a messenger system, it wasn’t actually an automated platform but it was just a way of, instead of using the telephones, so that was quite interesting but now obviously, listen, it’s great, we have got access to any market, loads of markets, it is so cheap to traders compared to how it was when it started, it is very competitive, all the companies are trying to undercut each other for costs. You’ve got absolutely amazing online platforms that used to cost five hundred per month, one thousand pounds per month you would pay for some premium platforms, now you get them free, you’ve got apps on your phones, you can check things whilst you are out, you can even deal on your phone if you must, you’ve got IPAD apps, tablet apps, whatever. Fantastic, and even, you can program your own automatic robots to trade, the world has moved on massively and it is only going to get better.
The great thing as well now guys is that it is all regulated, spread betting is regulated in the UK and it is run by a good standing reputable firms, some of these firms have been in business decades, they know the score, they have had ups and downs, but they know how to manage risk, they are unlikely to run off with your money, but if they do, as happened to me a few years ago with a company, the government will step in and if you have got up to the certain amount, I am not sure what the limit is at the moment but they will refund that to you eventually, it does take some time but it will get it back. It’s nice, it’s regulated, it’s run, it doesn’t mean that you have got no risk, you have obviously got trading risk there but your counter party risk, i.e. the risk of the company doing something unfortunate to you is lower, it is never eliminated but it is lower if you pick the reputable firm.
So the playing field has levelled quite a lot and that makes things interesting for us, it means that we can get involved in things that we wouldn’t have done before. It means we can trade at a level wouldn’t have before and we can play with the big boys to a certain extent. So, let’s talk a little bit about what is the spread?
What Is ‘The Spread’ In Spreadbetting?
Now, why is it called spread betting?
Well basically it is all around what is called a spread.
A spread betting broker will offer you two prices, this will be his first price here, so it will be a sell price and a buy price and you will get this on all platforms and it will be presented to you differently depending on who you trade with, in a ticket format or in some sort of table format, so you have got two prices and you have two choices, you are either going to buy or you are going to sell, so, the difference between the two is what is called the spread. This is your trading cost and it is how the broker makes money, there is a little bit more to that, how the broker makes his money but simplified, to put it simply, that is how the broker makes money. So if you buy at 3804 and you sell again at 3801 you have lost three points straight away and the broker has made that so he is hoping to make the spread from many people trading back and forth, buying and selling.
OK, so you have got a buy price and you have got a sell price, if you want to go long you want to buy you are going to use that price if you want to sell and go short you are going to use that price, similarly, if you want to sell what you have already bought you are going to have sell at the sell price and vice versa. So this is where the guys make money.
So, let’s have a look at position size and stake size. How does it work?
In spread betting, your position size is measured in pounds per point, for example, two points per point, so that means that for every one point move in the market, you are going to make or lose two pounds, so what do I mean by a point, so for every tick the market goes up, for every cent the market goes up, for every whatever the brokers determine is a point, that is what you are going to multiply your win or loss by.
So, if you buy and the market moves up 20 points and your stake is two pounds per point, you are going to make two times the 20 points it moved which is forty pounds profit.
However if you buy and the market falls, let’s say, 10 points, you will lose ten times your stake which in this example is two, you will lose 20 pounds.
Ok, let’s have a look at this little hypothetical example here and I will show you a real one in a second, so this is the price quote at the moment for whatever this may be, crude oil, probably not crude oil, now it is much more expensive than that, but let’s go with that, let’s say it is crude oil. The price quote at eight a.m. in the morning is 3801 to 3804, so the spread is three points as we have just seen. So, you think that that is going to go up, so you buy that at five pounds per point, so you put your order ticket in, you put in five, you are buying that at five pounds per point and obviously because you are buying it you are going to pay 3804for that privilege.
Let’s say a couple of hours later, three hours later at 11 O’clock the price has moved, the market has moved due to supply and demand, there is a lot more demand coming in for crude oil than supply and the price has moved up and at 11 o’clock in the morning, the price now sits at 3877to sell 3888 to buy, so, obviously you are going to sell because you want to close your buy position, so you are going to sell that, again, at five pounds per point, that will make you completely flat, that will close you out and in this instance, you have made 73 points which is 3877minus 3804, so the nett of that is 73, multiplied by your stake which was five pounds per point and that has given you a profit of 365 pounds in that instance and obviously vice versa if the market had fallen in against you.
So, if we are buying and we think the price of crude oil, I’ll use crude oil again in the example, we go long, it’s called going long, and let’s say we are buying it here at 36 on our chart, the price moves up to 48 and we close our position with a sell again to oppose that buy and we have made two dollars, which in spread betting terms is 200 points, so that would be whatever our stake was, if our stake was 50 pence, we would make 100 pounds, if our stake was 10 pounds a point, we would make 2000 pounds, I think you can see how this whole thing works.
And then vice versa, we’ve got the ability which is beautiful in spread betting to take advantage of falling markets, bear markets, markets that are going down and we do this by what’s called “going short”, so we are selling something with the hope of buying it back lower, so let’s use this same chart example right here, on crude oil, this is from a long time ago but on crude oil and let’s say that we decide to go short at the price of 50 dollars, around here on the chart and, the price then, later on, over the next few weeks, so whatever moves down to 40 dollars and we think that is a great deal of profit we have made, we are going to close our position with an opposing buy at whatever stake we took, we have made 10 dollars on that trade, which is 1000 points in spread betting and that is going to be multiplied by whatever stake we have taken, so if we have done one pound per point, then obviously that is going to be 1000 times one, which is going to make us 1000 pounds. So you can see how we can buy or, we can sell to make money.
Let’s look at an example from a spread betting blotter and this is the DAX, which is the German exchange, thirty stocks in the DAX, so a buy bet, we decide to buy the DAX here at a price of ten thousand, five hundred and ninety six point eight, don’t worry about the point eight, some brokers will give you, will split it up into tenths or one hundredths to give you very accurate pricing, the spread is still going to be the same and often with something like the DAX it is one point, so the buy price was 10,596.8, the sale price would be 10,595.8, or whatever the spread may be.
A stake of 45 pounds per point, here is the (inaudible 06:01) 11 minutes past two for example, 45 pound per point, there is your buy price, the price moves up over the next 13 minutes or so, this is just the day trade and then the sell price offered to me at 10,612.54, I closed that by selling my 45 pounds per point stake and my profit on the trade, on this little day trade is 16. points, just the difference between those two, multiplied by my stake, which is 45, ok, and we can see that the profit on that trade is £753.30, so that is the basics of buying and selling, how you make money, what your stake size is, how we make money from the spread betting companies by predicting the correct move in the market.
Spreadbetting Order types – What Is A Stop, A Limit & Market Order
Ok, so we looked at just buying and selling. Let’s have a little look about different order types. Now different order types can be used to open a trade at a certain price level, close a trade to take profits or you can close a trade to limit your losses, let’s have a look at each. Ok so a market order, sometimes shortened to MKT is buying at any price available and that may be how you would just buy if you went in and thought “you know what, I think the DAX is going to go up, I am going to buy here” and you would get your ticket up, you would put ten pounds a point or whatever your stake may be and then you would buy it and that would be a market order.
A limit order is an order to execute your buy at a specific price or better, often it is not going to be better but it is going to be at that price, so, there are two ways of using a limit order, the first way is to get you in to the trade, in other words I am not going to trade at the moment, if the market comes down to a level where I am interested in getting involved in it, then I am going to put a limit order in and get me into the trade.
The second way of using it is to take profits so in this example here we have got as a chart example, you have bought at this arrow point here and this is the euro dollar from a long time ago and you have put a limit order in at this point here and you have left it, the market over the next thirty minutes or so has gone up and it has gone through that, your limit order to sell has been executed and your trade has been closed, you have banked the profit.
Now, on the flip side of that, you can put what’s called a stop loss order in and that does exactly what it says, it stops your loss, so it is an order to close your position at a pre-determined price point, so here for example, if you had bought here, you have got a stop loss here under this cluster of price and we will take a little bit more about that later on, so basically if the price then reverses and comes down, you don’t have to be at the screen as long as you have got your stop loss in, as the market comes down and hits that level, it is going to exit you out of the trade because you have got a stop loss at that price, at that position size, ok, your position size of your trade, so there are two ways, two extra orders you can use cleverly to get in or out of trades.
Another one may be, if, let’s say, I wasn’t in the trade here but I wanted to be down here, then perhaps I would put my limit order here and if the price then came down and tagged it, touched it, I would be in the trade and then I can then use another limit, higher to get me out of the trade for a profit or I could use a stop loss order below to get me out, to limit my loss if the market hits that.
And there are also what’s called guaranteed stops, now you have to pay a little bit of a premium for those, what that basically means is, if you are holding a position overnight and the market gaps and moves dramatically, you are going to be guaranteed the level that you are going to come out at but for more information on that, have a look at the broker/brokers that I will recommend later, they will give you a much better overview on how they work for each specific company because each company executes them differently but the main things are the market order just gets you in or out right now, whatever price is available at the time, a limit order specifies the price you are willing to trade at, of course you may not get filled, that is the disadvantage of a limit, you may not get your trade or you may not get your fill but you are determined to have that price so you give up time sensitivity on that and then a stop obviously takes you out of the trade if the market should go against you.
So, another example here, let’s say the spread on this market is one point, so the buy price is actually, these are the wrong way round, let me amend these live for you guys.
Ok, so another little quick example here, this market has got a one point spread, the buy price is one point one, zero, two, five,six. The sell price is one, zero, two, five, five. Spread is one point, a very acceptable spread, whichever market we are looking at here and this is how you would take this trade, you could put a buy limit, which means you are buying the market if it comes down to this level, let’s say you want a buy limit of this one point one, you thought that was a good price to buy, you put a sell limit here which will be about one point one, zero, six, five, in between these two, so that means that if you bought here, you would be exiting here or if you hadn’t bought here, let’s say that you still wanted to go short here looking for the price to go lower and that would still work in whichever way the market moves, you are in short here or you are in long here, obviously if you are in long here, you want to put a stop in to limit your loss so you are going to put a sell stop obviously this is the opposing of the position you have got.
If you have got a buy bet on you want to sell it to close it for the size you have got at the level you want, similarly if you have got short here, you would put a buy stop in above and that would get you out of your trade.
It is important to understand these because this is how you limit your risk in trading, you know, making sure you are not on the wrong end of a move, if you are on the wrong end of a move, sorry that you are out and you don’t have that unlimited loss, if you hold a position for too long that could occur. So a great risk management tool to understand how to utilise stops and limits.
Spread Betting Tax – Is Spreadbetting Really Tax Free?
Ok, let’s talk a little bit about tax, because this is one of the benefits of spread betting if you are a U.K. resident. Now technically because you are taking a spread bet, you are betting and not trading. If you are buying shares or stocks you would be actually trading or investing and as a result, fortunately for us, the U.K. government treats its as gambling, so, gambling winnings are not taxable at the moment and obviously that can change, but at the moment they are not taxable, so, we don’t have to pay any tax on our spread betting winnings and in addition to that it is worth noting that we do not have to pay stamp duty when we buy or sell our shares as we would do if we went to the exchange, you have to pay stamp duty.
Now there are some very rare exclusions to this, it depends on your individual circumstances but generally speaking, the majority of people aren’t paying any tax on their spread betting profits.
You have got to look at the spread betting companies disclaimers, they say the same thing, that tax laws can change and you need to seek independent tax advice because like I say, there are some rare exclusions but on the whole for the average trader or betting guy, girl, your winnings are going to be tax free.
Now other countries have different laws as regard to spread betting and to betting so you need to have a look at what the tax laws are in your own country and unfortunately for you guys across the pond in the U.S., you are not able to spread bet, you can’t open a spread betting account, however there are plenty of other accounts you can open, so, all of this kind of stuff still applies, all the trading strategies later on still apply and how the market moves and everything is still exactly the same. If you know what spread betting is, just exactly the same as trading directly in the market, it is just wrapped up, it is put in a tax free wrapper and called a spread bet for U.K. citizens, to benefit from.
Trading On Margin, What Is Margin? & How Much Margin Do I Need?
Margin is basically the deposit that you need to fund a bet. Now believe it or not, when we buy a spread bet, we have what is called a notional value, a theoretical value of the trade and this number can get quite big or can appear quite big and basically on margin, it is normally expressed at a percentage of the notional value, so if we bought the FTSE at six thousand, five hundred and forty point five and we bought ten pound a point, the notional value of that is going to be sixty five thousand, four hundred and five pounds, now don’t worry, you don’t have to put sixty five grand up, if you were an investor you would have to but we are traders, this is what the whole thing is designed for and they understand, the companies understand that the FTSE is probably not going to half over night.
So, they say to us, “ok, we will allow you to put up a margin of one percent of that notional value”. So that means the money required in our account to fund that bet is six hundred and fifty four pound ten, a LOT better than putting up sixty five grand because we are using capital as a tool here guys, we are not investing our money, looking for a X percent return on our investment, we are using it as a tool.
So understand that this is a bit of a double edge sword, obviously if you are buying, you are using leverage like this and you are wrong, you are going to lose money a lot quicker than you would if you weren’t using leverage, but, vice versa, if you are right, of course if the market moves up one percent, you are doubling your margin stakes, if you put six hundred and fifty four pound down at one percent, market doubles, you are going to double that money, similarly if it goes down one percent, you are going to lose all of your money and actually, that brings me nicely to margin calls, you know, often if you do have, if the market goes against you, you have got margin up there, the market moves against you and you start to get into, almost a point where you haven’t got the money to fund it, you’ll get a phone call, well, you used to get a phone call, these days it is automated, it comes up, sends you an email or flags it up on your platform, either, reduce your position, close your positions to free up some funds or add some more funds to cover the margin.
So that is how that works.
Just from a trading perspective, be very careful about adding more margin, you know, if you’re in a trade that is not working, I think you need to get out and reassess it as opposed to just keep putting money into it because you haven’t planned the trade very well but that’s just from a trading perspective.
The margin is much lower on currencies and FOREX, Indices and commodities than it is shares, just because, number one, the notional value is higher, it is quite easy to get caught with a million pounds worth of exposure in these, as opposed to a quarter of a million pound exposure on shares, it is quite a lot and they are also judging it based on the volatility of the market you are trading, for a share to move one percent or ten percent in a day, it is not unusual for some shares but for a currency or an indices like the DAX or DOW to move ten percent in a day, that is a pretty drastic thing and unlikely. So they adjust the margin to suit and margin can be as low as nought point one percent for some currencies, going up to sort of two percent, indices and commodities, higher on shares, between sort of five and twenty five percent, it can be up to fifty percent depending on if there is news coming out or they are expecting earnings or something that is going to move the market.
At the end of the day, these companies are looking to cover themselves but it helps you, it means, then you know that any other traders trading with this broker aren’t going to blow the broker up because people are putting up a sensible amount of margin, they are covering their positions, they have got good risk management in place should the market start to do unusual things.
Overnight Trade Financing In Spreadbetting
Ok, so let’s talk about overnight financing charges.
Now if you hold a position overnight, you are going to need to pay a financing fee. You are basically being charged to borrow the money that you need for that position value, otherwise if you didn’t, you could have millions and millions of pounds worth of exposure just with that small margin up and it could grow your account by having that massive exposure, so you have got to pay some money to borrow that amount of money overnight.
This is calculated as a percentage of the notional size of the position, so we talked about the notional earlier on and that is about 2 to 3% per annum, they do it over the liable rate and divide it by 365 to get your day charge, and you are charged every day normally about 10 o’clock at night they put the charge on.
Now the great thing about being a day trader is, you don’t need to worry about that at all, if you open and close a trade on the same day there are no financing charges, this is purely for overnight. All we have got to worry about as day traders is the spread cost.
So let’s look at an example here, if we had a £10 per point position on the FTSE, long, six thousand seven hundred, our notional value for that is £67,000, let’s say the financing rate with the broker is 3% per annum, so the cost to hold the position overnight would be our notional, 67 grand, times three percent, divided by three hundred and sixty five to get our daily overnight charge, it would be £5.50, so it is not dramatic but it needs to be taken into consideration if you are swing trading or holding over a longer period, obviously that is going to add up on you, but again, reminder, for day traders, we don’t need to worry about this at all, in and out in a day, if you are flat at the end of the day, zero overnight financing charge.
Which Markets Are The Best To Trade?
Ok, so we talked a little bit about financing, margin, the cost of doing business, the spread, how the market works, the supply and demand about it. Let’s go now into a little bit more strategy and have a look about which markets we should be trading or which markets we can trade.
Well first of all there are about eight thousand possible markets to trade with, with some of the brokers, give or take a few thousand depending on what they offer but basically the world is your oyster, however, as traders there are a lot of those that we just shouldn’t be getting involved in and there are some that we should.
Now I have always found the best success is when I focus my energy exclusively on one or two markets, or a handful of markets and I have traded those well, I’ve known how they operative and I have really got into a feel for how they are moving. Not to say I don’t keep my eye on other markets as well for opportunities but I have found that is one of the better strategies.
So, in the currency sphere, you have got obviously the main currencies out there, you have got the yen, you have got the dollar, the pound, the euro, the Australian dollar, those are kind of the main ones, then you have got the smaller ones that come into that and they are called the minors or the exotics but the major pairs to trade or the most popular pairs to trade with spread betters and with traders that I know are the U.S.dollar: yen, the pound:U.S.dollar, the euro:U.S.dollar, and the Australian:U.S. dollar. Now, there are obviously other ones as well, like the pound:yen, euro:yen, all that kind of stuff but if you think about the main countries and then their currencies against each other, those are the most popular to trade, and also, it depends on what is in the news at the moment, when we had the Brexit scenario in the U.K. obviously the pound was a big player, when we’re talking more about the interest rate scenario in the U.S., the U.S. dollar comes into play, when we are talking about monetary policy in Japan, then the yen comes into play, so sometimes it pays to be able to move within your sphere of expertise.
So moving on, we have got indices, the main ones that people like to trade, obviously in the U.K., the FTSE 100, the DAX 30 which is Germany, the DOW 30 which is in the U.S., the NAS DAQ 100 which is the tech obviously in the U.S, and the NIKKEI 225 which is the Japanese stock exchange. My personal preference is the DAX and the DOW, I really like those two markets, I have traded those now for a good ten, twelve years if not more, so they are good markets because there is good volatility there, the spreads are nice and tight, they are a great day trading vehicle and obviously there are other indices there, you have got the Australian index, you have got any other index you want but you have got to watch a little bit, you have got to be careful about the spread, we will talk about more of that in a second.
Commodities again, a massive array of commodities, the most popular ones are going to be crude oil and gold and then if you look at some of the others we have got wheat, corn, soya beans in the soft commodities sector and then we have got silver as well, this is a little bit thin silver, it probably shouldn’t be included in the top popular one really, gold, crude oil are the top one and wheat is the top soft commodity so, they are worth, looking at them, in stocks and shares we have got a big field of them, U.K., the big ones, Tesco, Vodafone, Lloyds Bank and in the U.S, Apple, Facebook, you know, Netflix, Disney, you name it, any big company in the U.S. is traded, so, we have got a good selection to trade, there is nothing stopping us trading whatever we want.
What Time Do The Markets Open – DAX, DOW, FOREX, FTSE
Let’s look a little bit about the hours of trade because it is very important to pick the right market to trade rather than being focused on just one straight away, having a look and see what’s available, fitting it in to your schedule, your own personal life schedule and then deciding what to trade around that, so, currencies, we have got twenty four, five for most of the currencies as they move across the continent, so five days a week, twenty four hours a day, euro trades moves into the U.S. session, moves into the Asian session so you get basically a twenty four hour a day market, you can trade those whenever you want. Sometimes the volume is a little bit thinner in certain currencies but in the big ones they are going to be very liquid and good volume, enough for us anyway, twenty four hours a day.
Now the U.K. stock exchange opens at eight a.m. U.K. time, it closes at four thirty p.m. and then it has got a five minute auction period, so you get the official closing price at four thirty five, so if you are trading U.K. stocks or spread betting U.K. stocks, those are the times that you can trade them, and once that four thirty closing bell goes, you can’t then adjust your, you can’t then trade U.K. stocks until the next day and that is Monday to Friday and that is the same with the German DAX, the German deutsche boerse opens at eight a.m. U.K. time, closes at four thirty p.m. U.K. time, so you can only trade German stocks, Volkswagen etc. during that time.
So, these are the most liquid times for our DAX and our FTSE 100, they are traded, most brokers will offer them after hours so you can trade the DAX right the way through to nine o’clock and some of them you can trade all the way through overnight, that’s just the DAX index, the stock exchanges close, you are just trading the index, which is fine but appreciate that the most volume for the U.K. and the German is going to be between eight o’clock and four thirty p.m. and that’s when you are going to get the most volatility as well in your FTSE100 and your DAX index.
Going on until nine o’clock at night, the U.S. markets, the U.S. stock exchange, excuse me, opens at two thirty p.m. U.K. time, closes at nine o’clock U.K. time so that is when the U.S. markets are most active, that’s when the stocks are open, you have got a little bit of pre and post markets, slightly different in the way that they operate over there, however, spread betting wise, you can only trade stock between those hours, two thirty p.m. and nine o’clock so if you wanted to trade TESLA, you can only trade it between those times and of course that’s when you are going to get the most volatility in your DOW index because the stock market is open and that is affecting the whole index.
Now your DAX and your U.K. are going to be trading as well but they are going to tend to follow what the U.S. does, when the four thirty bell goes and Europe closes, we then get that little transition period where the DAX and the U.K. FTSE follow what the DOW is doing because the DOW is trading for a few more hours up until nine o’clock so it tends to follow that, so if you are trading the DAX or the FTSE after four thirty, the index, then you’re probably looking at just how the U.S. market is trading.
So, you know, we can trade most things twenty four hours a day, there is going to be a quote out there, apart from our stocks, Monday to Friday, but the main volume is present when the underlying exchange is open, that’s the important thing to remember.
Now the great thing about being a European trader is that if you do have a job or you do have other commitments in the day, you can be back at home at six o’clock, seven o’clock and you have still got two hours or so, two and a half hours of window to trade the U.S. market which is a great way of learning to trade if you are new to it, so you don’t have to be there in front of the screens during the day or trying to flick, trying to have a little sneak peek to see what the market is doing, you can do everything that you want to do, you can become a day trader and learn the craft when you get back from work in that evening session in the U.S. hours, so that is a really nice ability that European traders have.
What Is Volatility & Volume? Why Are They Important
Ok, I want to talk a little bit about volatility and volume and this I call the ying and yang of volatility and volume because with higher volatility and volume comes greater opportunity, there is no doubt that traders, seasoned traders look for volatility and they look for volume.
When we have good moves, like Brexit, when we have good trending moves and we have supply and demand imbalances as we mentioned earlier, that creates great opportunity because at the end of the day we are looking to buy and sell higher or we are looking to sell higher and buy lower, so the more swings we get, the more chance we have got of making that happen, however, it can be a double edged sword, if you are not managing the risk and if you are not really doing the right thing in terms of making sure that you aren’t losing too much, if you are wrong, that’s fine but going back and back and back and back into the market and losing money is not really acceptable as a trader, this can catch you out, so you have got to respect it, just like you have to respect things like the sea or the ocean, you know, you have to respect the market and its volatility and its volume.
So, trade when there is likely to be good volume, as we mentioned before, when the underlying stock exchange is open, that’s when you are going to get good volume on your index, so if you become a DAX trader, specialise in trading it when the stock exchange is open because that is when you are going to get the good swings, that is when you are going to get the good volatility, that eight p.m. until four thirty p.m. time period or if you are trading the DOW, the two thirty p.m. to nine p.m. time period. Yes, there will be some volatility after that but generally speaking, on a broad term, that is when you are going to get the best volume, so, focus your energy on that as a beginner or intermediate trader.
Stocks and shares, once they are closed, you have to wait for the next open, we have discussed that, you cannot trade those after hours if you are spread betting. The indices, the currencies and some commodities you can trade after hours, a lot of crude oil trade, most brokers allow that twenty four hours, gold, a little bit of, not quite twenty four hours, some of them do, some of them don’t and they will close it but you have to look at your own broker for that but the spread does widen, so be cautious about that, if you are looking to trade after hours particularly anything that is not, like for example, the FTSE after nine o’clock or the DAX after nine o’clock at night, then the spread is going to widen because they haven’t got the liquidity so they need to make their profit from widening the spread, so be very cautious about that.
At the moment, as I record this, the most active pairs are the yen pairs, the U.S. dollar:yen, the pound:yen and the euro:yen, what I will do is, I will update these in a link that I give you at the end of the course with the most active pairs, the things that people are trading the most in the spread betting world and what I am trading as well and that will be in video format or that will just be in links, just for information so you can keep ahead of what’s going on and what people are watching.
I love the Dax and the DOW, I have traded those for many years and they are a day traders favourite, the spreads are very, very tight, the ranges are very, very nice, it’s a great day trading vehicle and then U.S. stocks, you basically want to pick stocks that have nice volatility and daily range and that comes and goes, sometimes it is the tech sector, sometimes it is the banking sector, again, you just have to be in tune with what is going on and I will help you with that with the link, so at the moment, things like Tesla, Netflix, Apple, Google, Facebook and Twitter are all very, very active, all very good trading vehicles.
Biggest Spreadbetting Mistakes – Things To Avoid When Choosing A Market To Trade
Ok, so we have talked about the things that we CAN get involved in, what should we avoid, now, I would just like to say there is no right or wrong way to trade, I know traders who have made a LOT of money becoming specialists in one specific niche, just as I know traders that have made a lot of money becoming traders in something that most people are trading in, the most popular things, so, it is all personal preference, however I would recommend personally, if you are a beginner or intermediate, you stick with the bigger markets and avoid these kind of things here, so the first thing to avoid is, just to watch the spread relative to the daily range of the market, so what do I mean by that?, so, if your spread, and we have talked about, we know what the spread is, is ten points but the market in a day only moves in a fifty point range, so from low to high the average move is fifty points and your spread is ten points, that is going to make your life very difficult as a day trader.
If you have got to pay ten point spread straight away and in the whole day the market only moves fifty, you are really going to struggle to make money as a day trader, so, watch out for that, avoid that, that’s a unique thing but on some of the smaller indices, that can be a problem, so don’t think, “ooh, I’ve found a little country somewhere that has got an indices that I want to trade”, that’s fine but just look at the spread and then compare it to the daily range, we are going to look at charts in a second and how you can read that but that is very important.
Number two, small cap shares or stocks, now, not all brokers offer these but if they do, be very careful because the liquidity can be low at certain times and especially if they are moving actively, you might find the spread goes really, really wide and you can’t get in and out of your position and that makes them very difficult to trade, so, avoid those if you are a beginner or an intermediate.
Some of the lesser known exotic currency pairs have larger spreads as do some indices as I just said, some of the obscure, smaller countries, those pairs are going to have a big spread and they are going to be a variable spread as well, so you have got to watch out for that in terms of, as the market opens or closes, that spread is going to widen or narrow, again, making it very difficult for you and if you are not familiar with it, that is when you can get caught out, and be important to manage your risk, so stick with the majors across all the asset classes, there’s loads, there’s more than enough there and you’ve got your biggest continents, just stick with those, everything in the U.S., everything in the U.K., Europe, etc. and Japan, all those things, plenty of liquidity there, loads to choose from, whichever type of trader you want to become, there is enough choice there to get involved with that.
Different Market Characteristics & Types
So, market conditions, characteristics and types, now, I am going to move on in a second to our charting and technical analysis module, however, I just want to mention this, which is very important. You have got in my eyes, three different characteristics at different times, you have got markets that are trending, which is this here, so you are going to get a drive up, some sort of pull back and then a drive up, maybe another pull back and then a drive up, that’s what called a trending market and it is the same if you are doing down, it is the same thing, just in reverse, you have got a range bound market where you have got an upper end of the range, a lower end of the range and the market is just ping pong back and forth within that range, that could be during the day, could be during the week, could be during the month, could be during the year, there are stocks out there that are stuck in these type of ranges for years, there are some days when you are trading the market, your favourite market and it is sticking in a range all day long and there are some days when it is trending off to new highs. So, there is also the final one which is “choppy”.
Now, I always say avoid choppy, which is different to range bound because choppy means the range is narrow but it just doing unpredictable things, it is moving out of the range, it is chopping round, it is just generally doing not a lot and normally, that is in a very narrow band, so, those are, that’s a day traders worst enemy, if a market is choppy, if it is just moving around with no real direction, and you will start to get familiar with that when you start to look at charts and you actually do some trading.
Stay away from it, honestly, I would recommend highly, you avoid all choppy markets.
If, different trading strategies are used for each condition, so, if you are trading a trending market, and as I say, we will look at this in a bit more depth in a second, you are going to use a different trading strategy than if you are trading a range bound market and it is important that I put this in now because I think it is a fundamental a lot of people forget and it is very important to understand and respect the difference between the markets and not try to force your will or your strategy onto a market, so understanding the different condition, characteristic and type of market and this can happen from market to market. So one market can be trending, one market can be range bound or the same market can go through different phases of going trend bound, sorry, going range bound, trending, range bound, trending and understanding that that market can change is very important as a trader.
What Is A Trading Chart In Spreadbetting?
Ok, so charting and technical analysis. Same thing really, one is just a nicer name for the other, it is a process of looking at charts to make a trading decision, so, with charts, charts are basically showing us the price of a market or a stock or a share, whatever it may be, an asset, in the past and it is plotting us the direction of that price over time.
So, here we have got a very basic line chart, and this is not what generally traders would use, but we will look at those in a second, BUT, we will just show you the axis, what we have got here, we have got a daily chart and on this side, on the Y axis, actually we have got a double axis here and it is showing you exactly the same thing, that is giving us the price and on the X axis below, it is giving us the time, in this case it is giving us, it is splitting it up in months, so it is a daily chart.
So, each point on the graph is going to be a day and then they are linked up with a line, so you have got a day there, a day there, so what point is actually being shown on the line chart? Well, on a line chart or line graph each point is the closing price of the day, so the closing price of the stock, of the index, whatever it may be and those are all plotted day to day, day to day, put on a graph and then a line is drawn between the two. So what it does is, it allows us to visually see at a glance, what the price has done beforehand, in the hope that we can glean some information about what the price may do in the future.
So for example, let’s just look at this one broadly, we can see the market back in the beginning of the year has sold off heavily from that seventeen thousand six hundred level, pushed down, hit a low, couldn’t break through a low, then did rally, did a little blip here, pushed to highs, so you visually can see, if you have not been trading it or being aware of it, in a quick two second glance, you can have an idea, “hey, this market is pretty close to highs”, “this market has come from its lows in the beginning of the year” and you can get a lot of information very, very quickly, so this is why we use charts, so we can see exactly what is going on.
Now, traders prefer to use a chart that gives us more information, so we have got two other chart types, exactly the same chart as that line graph there but this is now a bar chart and a bar chart is giving us four pieces of information, it is giving us the low of the day, the high of the day, the open of the day and the close of the day and it is putting it in a format that we can see visually in one picture. Exactly the same as we saw for the line graph but more information.
Another one is a candlestick chart, exactly the same as a bar chart, giving us those four pieces of information in one candle or one bar and then visually presenting it to us in a chart, so, traders prefer to use bar charts and candlestick charts purely because they give us more information.
What Are Line, Bar, Candlestick Charts? How Are They Constructed?
Let’s have a little look exactly how the bar chart and the candlestick charts are formed.
The first thing to note is that a lone chart is just a point plotted at close. I think we have all done that, may have been at school or whatever. Your point is plotted as we can see and then we just draw a line or the computer draws a line between the two and that gives us our line chart, very basic, very simple, fine for just visually seeing what is going on, but for a trader we need a bit more information than that. The two favourites that traders have are the bar charts and the candlestick charts. Personal preference, I prefer candlestick charts but I know guys who prefer bar charts, it doesn’t matter, but you really should not be using line charts at all if you are a trader. They don’t really give you as much information as you need.
In a bar chart, a bar is drawn, the top of the bar is the high price for the day, so you can imagine a day’s trade. Let me just redraw that, the top of that bar is where the highest point that that market traded in the day, that is relative to the axis, so if you can imagine our price axis here and we have got price along here going down whatever that may be, then time along the bottom, in this case it would be one as it is the first of the month, there the one day. In this instance the very top of that bar is the high of the day in this case was say one hundred, the bottom of the bar is the lowest price that the market got for the day and in this case 97 or 97.5 and then these little notches here that we have got, that is showing us the opening price and that notch there is showing us the closing price.
So, we can see really at a glance what the market did during the day, so if the market has started down here it has pushed a little lower, pushed back up, done this made a spike up to there, moved back down here, done this, come back up and closed there. On that bar chart, it is going to say look, there is the high, there is the low, there is the open and there is the close. Let me just plot that like this, then I can show that to traders. Then you can visually see for each day what has happened as you can see there is far more information that we get than in a line chart. Candlesticks are very similar they are showing us the high or low for the day, they are showing us the open or close, but these are colour coded and although you can colour code bars you need to colour code candlesticks to show you what has actually happened because basically if the candle is green, then the open of the candle – what we call the candlestick – by the way the candlestick body is this bit here, so it is the bit that is coloured in whether that is green or red, that is the body and then we have got these little external things that protrude out of the body called the wick and the tail, so the tail is at the bottom or top and the wick is at the bottom or top.
Again, it is personal preference some guys call it different things, I like to call the bottom – I could just call the top of it the wick obviously like a candle and I like to call the bottom bit the tail obviously because it is the bottom of the candle. If the open is lower than the close, like this example here then the candle is going to be green because the price has moved up during that day period, so just like the bar we have got a little mark to show us where the open is at the bottom of the candle body and where the close is that is the top of the candle body, that is shaded green to show us that the close was higher than the open. The high or low for the day, so the extreme is denoted by this tail here where that goes and the high of the wick. So, we get the four pieces of information, the open, the close, the high and the low.
Then vice versa if the market closes below the opening price the candlestick is coloured red and we see a red candle. Again, the open is there, close is there, low for the day is here, high for the day is here, you can see how much information we can get, very nice, very good to see and the colour coding helps us to see what has happened during the day. Now, it is important to note that the colour is based on the open to the close. If a market gaps, so let’s say, overnight you have some news in a company, that means that the company is worth 10% more, so we get a 10% gap on the Monday morning, so the open on Monday is much higher than the Fridays close. You are going to get a candlestick that moves up, the open is going to be here, let’s say the close was here, but if it trends down during the day it may well still be coloured red because the open is higher than the close. It is not relative to the prior day.
So even though the market may close up on the day the candlestick may still be coloured red because it is relative to that opening price. So, we understand that, we understand that it is important to use the bars and the candlesticks – what else the basics of charting, what is going to help us as traders? So, we use examples of a day. So, a candle represents a days’ worth of trade, a bar represents a days’ worth of trade, a dot on a line is just the closing price for a day and that is all very well, but as day traders we want a bit more information than that.
What we can do with our charts is we can adjust them to show a variety of time frames, so traditional daily chart shows one day per bar, or one day per candle, so the day’s high, low, close and open. It just goes into one bar; we need to drill down a little bit more.
As traders, we want to drill down a little bit more because we are trying to get those little swings intraday, we need more information. What we can do is we can change the time frame on the chart, so each bar, each candle can represent a different period. Instead of representing the day we can have it to represent two hours’ worth of trade, 60 minutes’ worth of trade, 15 minutes, 5 minutes, 3 minutes or 1 minute. Whatever we want those are some of the most popular ones.
What does that actually mean?
It basically means in 1 minute that candle will print the open of the minute, the close of the minute, the high or low of that minute, so over a 10-minute period we would have ten candles showing us exactly what has happened to that price over 10 minutes. Same if we are using an hourly candlestick, each candle represents an hour worth of trade and let’s say over an eight-hour period we would see eight candles showing us eight hours’ worth of trade. Now, this is personal preference to which ever you use as long as you can see all the price action you need to that is the candlestick pattern, or sorry the candlestick time frame you are going to use.
Obviously if you are really finite scalping you want to use a very short time frame because you want to see where the market has gone in ten minutes give me ten candles to show me that. If you are trading on a longer time frame your swing trading you are looking for a multi-day move you don’t really need that information and of course the more candles you have got on your chart the less information you can see in terms of the amount of days, but the more focused information. Let’s have a look at some examples.
Which Is The Best Chart Timeframe? Choosing The Right Timescale To Trade From
This is an example of the DAX as we are now and this is a daily candlestick chart, so each of the candles is representing one days’ worth of trade. As you can see this candle really big down candle, open was right at the high, so we didn’t get a wick forming, if we just zoom in on this, no wick so the open did equal the high. The close was down at the lows here, really big hammering day and because the close was lower than the open we colour it red and then we went a little bit lower on the day but we did not quite close on the lowest so we have a little bit of a tail there. There is the same with any of these we can start to see now, look at this type of day here, a big high a big low but actually the open and close were very, very close to each other.
You see how we can eyeball that and we can see – if you look at the difference between say this where the open and close was identical, didn’t do much and then this one here where the open was at a low and the close was at a high, not much wick or tail at all showing us that it was a trend like day. We get a lot of information in there but, of course, as day traders that is not really useful. We’ve got almost a years’ worth of information there, I am just scrolling my mouse to be able to do this.
By the way a link to these free charts again is available at the end, I will put it all in one easy to reach area, tools area, so you can look at this and go and grab these charts if you haven’t got them already.
One day, one candle, not very good for day traders. Let’s say I want to now look at an hour, so I change my interval, and now it is telling me that each candlestick represents an hour worth of trading. But can you see how much more information we have now got. We have got one, two, three, four, five, six, seven, eight, nine, almost ten days’ worth of trade. We can then sit down, we can’t see what happened at the beginning of the year because we don’t care, we are day traders, we are just looking for an opportunity, or we are swing traders looking for a short-term opportunity. We know what happened in the year because we have looked at our daily chart, now we are trying to drill down a little bit into to the timeframes to see a little more carefully what has happened. So, there is our hourly chart, what can you deduce from that? You can say well actually look, five days or so ago, we were up at these highs at the price there on the right-hand side 10,760, we fell pretty hard, we gapped lower on this day, we managed to fill that gap but we are now coming down here and we are playing around with this level down at the lows, so that is a bit more information there.
Now, we might move to a 15-minute chart. A 15-minute chart again just means that each candle is made up of 15 minutes’ worth of trade. Now, you can see we have got much less in terms of the amount of days in the chart but much more focused and drilled down information. We are starting to look with a magnifying glass or a microscope as opposed to binoculars. We look at a broader picture with binoculars and then we look with our eyes and then we look with a magnifying glass and the microscope to try and get the information. I am starting to see a little bit more information now.
I can see more clearly yesterday how we traded with the highs and the lows of the day, how many times we touched those highs and lows of the day. Where we opened, where we closed, how it was relative to the prior days’ trade and now I am going to drill down even more I am going to go onto a five minute, because I want to see more trade of the day, I want to see exactly what happened in the afternoon. So, from 13:30 right the way through to today, I want to see exactly where we have gone.
Now, I can see, I can see each individual ebb and flow of the market in much more detail than I would do if I had a higher timeframe. Then I am going to go even closer, I am going to say right I know what I am going to do now, I am going to look at 1 minute chart and I am going to see exactly what has gone on.
I can see, look at this spike we have had just in the past 20 minutes or so, we had a big spike up out of nowhere, took out the highs and now we are just drifting back, so each candle is representing one minute and you can see how this one has produced now, it is ticking around with the price as it changes on the exchange. We are 10398, 10399, 10398 and the candle is changing as we go, you can see it is changing from red to green now because obviously the open was at 10397, so every time the price is above that and if we close here we are going to get a green candle, if we close below that we are going to get a red candle. You can see how we start to get a bit more information but it is a trade-off, do you want all the information from all the days, or do you want just the information from the current day.
Now, we will look at some best practices in a moment, but just understand the concept of the sacrifice if you are going into a smaller timeframe but also the benefit. It is about appreciating the benefit, disadvantages and advantages of different timeframe charts and integrating those into your trading.
The bigger picture
I want to add this in here now because I think this is very relevant, if you are trading, one of the best practices you can do is you start off with a higher timeframe.
By higher timeframe I mean daily.
So, you look at the chart of the market that you want to trade and you just see where the big levels are on the market. Where the market has stopped, where the market has been to, what the market has done. Then you move down your timeframe, you are then looking for an hour, and you see exactly what the market has done in your hour. You then drill down even closer into a 15 and then once you have got all that information, you have written down the levels, the key levels, you have marked them off on your chart, what has happened, then you can go down into a one minute. I wanted to put this in because a word of caution that if you have your chart purely on the lowest timeframe and you are just looking at one minute it is easy to miss the bigger picture, so you can often miss the fact that maybe you are pushing to yearly highs and you have not noticed it because all you have got on your chart is two hours’ worth of data.
So, always being aware of your higher timeframes is very, very important as a trader. Having awareness of where we are because at the end of the day the institutions, the big money guys, the guys shifting around the money that moves the markets aren’t looking at one minute chart, they are looking at the bigger charts and yes they can’t because they can’t move that money quickly enough, so, it is advantage for us. However, we need to be aware of those longer-term levels, of those positions, of the key things that everyone else is looking at.
So, it is important, start with those higher timeframes work your way down.
The Bigger Picture
What Is Support & Resistance On A Chart? – How Do I See Support & Resistance?
We’ve seen a chart but how do we decipher the information that is on there. It is all very well having a chart and understanding what it is showing us but how can we decipher that and how can we generate a good trade idea from that.
For me there are four main things or skills to learn when you look at a chart and I am going to run through each one in detail.
The first one is support and resistance, so we look at what is support? what is resistance? and why that is important.
Secondly, trendlines, what are trendlines, how are they important and how can we draw them on our chart. There are three Key Levels, a little bit different from support and resistance and I will explain why, and how can we trade from them and what they are used for. The final one which I think is over looked by many traders but honestly it is very, very important is the time of day, we get so focused on price, time of day is very important and I will tell you why in a second and what we can expect when we utilise that time of day and how we capitalise on it.
So, let’s look at our DAX chart again, I am going to use a 15 minute or maybe we should use an hourly, let’s take a good timeframe that we can use.
What is support and resistance? Well, basically support and resistance are areas where the price has moved to but not been able to break through, okay and the more times the prices approached that level and not been able to break through the stronger that support or resistance is. So, I look at this chart now and I would say we have got some strong support down here, so I am just using my drawing tool and I am putting a line to represent what is called support here. Now when you are drawing your support or resistance levels you don’t have to be finite, you can see that we have bounced through it by a few ticks here and there and it is not a very accurate level but it doesn’t matter it is often the case. Sometimes you will get it moving right to the tick and it will just touch it and then move away, but often you are going to get this scenario where it just sometimes goes through comes back. The main thing to see here is that that is a key support level, the price has been supported every time it has come to that level.
Now, why does that happen? Going back to that seesaw analogy there is two things, one is that the supply has been shut off, in other words sellers have got to that point and said I am not prepared to sell any lower and so the natural change of supply and demand has caused the price to drift back up.
The other way of looking at it is that buyers have been waiting for that level to buy at and then they have come in and they have bought it and it has caused the price to rise because they have decided that they are going to start there buying at that level. So, that is how we draw a support.
How do we draw resistance? Well, resistance is just vice versa, if you look up here I can see twice in two days we have tagged this high and I would say there you go there is a nice resistance level there up at that high. It is basically telling us, it is the opposite of support, it is where the market has gone to and hadn’t been able to push through it, it, has encountered resistance to the upside. So, support is underneath the market, resistance is above the market. If actually we drill down and go onto a 5-minute chart and let’s look at some intraday kind of stuff, I am going to notice straight away on the prior day look at this resistance here, if I just zoom it down here, so each candle is representing five minutes, look one, two, three, four, five if not even if you count those that is a big thick key area of resistance, the market failed to push through.
So, that is information for me. I can even go right the way down and say well actually I have got a really short term support here over a 15-minute period, so I have got a 15-minute support and eventually that support broke and you can see how the momentum took the price through.
Very important to be marking these down on your chart, as it is to be looking at your bigger timeframes as well.
You know, so we go back to our daily, let’s reset the scale a little bit.
We can look at our daily and say well yes, that resistance level that we had yesterday or a few days ago was very key because it has been the daily resistance level and the support level that we have go has been in play for many, many days. Let me just remove all drawing objects and I just want to look at this and just show you something as well going back to the concept of support and resistance. So, we recognise that support is underneath the market, resistance is over the market. You get what is called a transition, if we look here and we look at this price when we were back here, this level this 10,400 level, this 10390 level was a key resistance level, we bounced of it in late April, we bounced of it in the end of May, and then we bounced of it again beginning of June, so that became a decent resistance level.
We can see that; we can understand the concept of that, however, we then broke through that in the summer, we had one more struggle to get through it and then we broke through that resistance level and that has now become support. After we break through the key level, when we come back down and revisit we can then change what was resistance into now support and see how the market has bounced of it once, twice and we are now right at it and we are testing it. This is a really big key, important level that all traders of the DAX are going to have on their chart. It was resistance it bounced of it several times and it is now become support. That is how you draw your resistance and support lines; in whichever timeframe, you are looking at. You don’t have to be completely accurate with it, I don’t think you need to be really, really focused on it, but you just have to be broad and say that is a really key level, that is going to come into play during the trading day or not as the case may be but at least if you know it is there then you can be prepared for it.
What Are Trend Lines On A Chart & How Do I Draw Trendlines?
The next thing to look at is a trendline.
What is a trend line? Why is it important? and how do we draw them?
I am going to look at a different market for this, I am going to look at the US Dollar/Yen because I know that that has got a big trendline. So, a trend line is basically, we talked about a trending market and a market that trends is one that goes from high to low or from low to high, it is not in a range. That is a range bound market. A trending market is the one that goes high to low or from low to high. We can see straight away that this US Dollar/Yen over this year has been trending down, sure we have had moves back up and moves back down and as a day trader there is plenty of opportunity on both sides of the coin there, but we can see that we trended down in the market.
How do I draw that?
What I do is I get my trendline drawing tool and what I doing is I am looking at the peaks of the trend and I am going to try and join them up with a line. Again, it does not have to be very accurate you can see I have just sort of drawn over some of the price action there a little bit, but it gives us a framework for our trade. We can say the market has been trading down and we are currently touching that upper trendline and we can start adding the other concept of support in and say well, look there is some support down here at the 100 level. Let’s put my volume back in, at the 100 level here and we have a trendline down. So, we start to add the concepts in together. Even if we looking at little trends within trends, there is a little trend there and we can do both sides of that like a channel, I am going to call that a channel. We are just looking to frame the market position and we can even go further and say look, there is a little trend within a trend there. We start to build an idea of what the market is doing and as with every concept we can start to drill down into smaller timeframes.
Look here we have got a small one minute uptrend that came into place, so there is a trend, we draw our trend from peak to peak and then we can even draw it from low to low, okay it is not going to accurate and exactly often. Sometimes it will be, sometimes it won’t but again it gives an idea to frame the trade. We can see we are in that upper trend, we started to break out of it and that was enough and once we finally broke out, we went into a little bit of a rangebound market. That is how we put trends on our chart and that is how we utilise it.
What Does A Key Level Mean On A Chart? What Are Key Levels & How To Draw Them
Another thing that is very, very, important is Key Levels.
Now, support and resistance can be classed as key levels, but there are other levels which are key which I think are very, very crucial and we want to know “how can we trade from them and what are they used for?” So, let’s get back to our chart and have a look at what’s going on. I am going to pick a stock, let’s pick Apple stock, let’s go onto 1 day and let’s see exactly what is going on. In fact, you know what let’s go onto a one hour. So, we had the iPhone 7 recently come out and each candle is representing one hour.
What is important and why?
What are the levels that are important and why?
It is important to understand where the market closed yesterday, so yesterdays close, yesterday’s high is very important, yesterday’s low is very important and then today what is the current high of the day, what is the current low of the day and what was the opening print of the day? because those levels come into play as a trader. If you can see here on Apple, look we have gapped up here, there is the open, there is the close, there is a big gap up and we have not filled the gap. The next day if we are trading this day here and each candle is representing an hour don’t forget, this is a very important level, the high of the prior day was broken very early on in the morning. That is showing us the strength of the market. You are understanding not only have we gapped up because the close was here and the open was here, so we have what is called a gap.
In other words, the open is higher or lower than the prior close, but, not only that we are then going above the prior days high, that is giving us a signal that this market is very, very strong. So, understanding where we are in relation to the prior day’s trade is so, so important. The key levels to always have on your chart are, the prior days high and let’s go to the DAX again, the prior days high, the prior days low – let’s go to a five minute so we can zoom right in on it.
Look at this now, you can see the prior days low we had was here, so I am going to get myself a horizontal line and I am going to put it on there. I can see what the price response was when we go to that, I am not going to go into too deep – too much of the concept now, but just understanding, look having that marked on our chart you can see that we pushed through it, we had a little bit of a tail forming and then we pushed through it again. Then it is the same during the day, then during the day I am going to mark of my high of the day, so just after 08:20 we had that high and we were sitting in a choppy area. Then this is what caused a bit of a spike in price, is that we ended up pushing through that key level which is today’s high. I am also going to have obviously, yesterday’s high on my chart should we get to that level.
It is very important to have the high, the low, the prior days close and the current high and the current low and the current open, because they are very important to understand the relationship of current price position compared to those.
Why Is Time Of Day Important In Trading?
Finally, a concept that I think is not quite understood as it should be, I really take a lot of focus on this, is the time of day.
Now, why is the time of day important? What can we expect at certain times of day? and how do we capitalise?
Let’s go back to the chart again and let’s have another little look. Generally speaking, volatility or volume is in a kind of smile format, if I look at a days’ worth of trade, that is what the volume is going to look like. So, we are going to get at the open, the stock exchange open we are going to get good volume, as a lot of participants come in, or institutions do a lot of jigging around, they do a lot of changing of their positions, adjusting of their positions, retail come in, so you get a lot of volume at the start of the day. Then as you move into lunchtime period volume starts to die off so you get that little low in volume, volume goes lower and as you come into the close volume picks up. That is why it is quite nice if you are European trader, to be able to trade that 7-9pm US session because volume is picking up a little bit.
Obviously, this is a generalisation and it doesn’t happen all the time, but this is where it becomes important to look at these things. So, time of day, why is time of day important? Time of day is important because you are going to notice a change in trend, a change in price direction very often at specific times of day. The DOW opens at 14:30 so all the European markets are going to suddenly change how they trade based on how the US market has opened. Obviously, that is within that 8pm to 4:30pm opening period of the European market. So, when the American market opens everyone starts looking at the American market for direction. If that suddenly rips to highs, then obviously, Europe is going to take notice and is probably going to rip to highs too.
So, very important to understand what other markets are opening during the market that you are trading, same with the currencies as the Stock Exchanges open, the currencies are going to be affected.
Then you have got things like lunch time, well the lunch time is quiet you are going to stay out of the trade because nobody is there, coming to the final hour of the day if it has been a busy day it may well be very, very busy going into that final hour because a lot of traders are positioning because they know that the bell is going to go in an hour or so, so they can’t then do the trades they want so they need to position now. It is the same with things like data, we are going to talk about economic data and how that comes out and affects the market in a later module, but understanding the time of day and how it is so important to the relationship of the market that you are trading. Just treating everything as the same is a mistake in my eyes, that you have to split the day up into chunks and understand the market moves differently in the morning straight away than it does at lunch time when it is quiet and everyone is having lunch or everyone is in meetings in the city and then in the evening in the US, the different relationships between the two are very, very important.
Which Are The Best Trading Indicators In Spreadbetting? What Are The Strengths and Weaknesses Of Each?
Before we move on to trading indicators, I just want to say that the foundation of good trading is going to be, how you are able to draw things on your chart. If you can draw support and resistance, great that is fine, but the key is understanding the relationship between price and movement.
Supply and demand. I think a lot of traders make the mistake that they forget the price is just people transacting, you can see all these lovely charts and yeah the chart packages are great and they give us all the information we want. We have got all this computing power, we can do lots of things with it, but ultimately it is just people agreeing on price. If we get back to that basic, it becomes easier to generate trade ideas and we start to see that people are buying at highs or they are selling at lows, or they are doing nothing, that is when we can say ” have we got an edge as a trader?”, ” Can we make a good trade idea from this?”, “Can we take some profit from the market?” rather than just looking solely at what the chart is saying it is interpreting that into human transaction and that is very, very important that.
So, trading indicators, there are strengths and weaknesses to indicators. I am a big advocate of saying listen I have got a strategy; I have got a price pattern I like to look at. Let’s say I want to look at a trend then I want to buy a pullback from the trend and I am going to use an indicator to help me make that trade as opposed to just using the indicator as a complete guide and saying it is just a yes or no tool, it is telling me when to trade. I prefer to use it as a filter and as a little bit of a guide as to when I am going to execute the trade.
Actually, later on in the course when we talk about this powerful trading strategy that I use, that does have an indicator in it, but again and we are using it in conjunction with a pattern that appears on the chart. So, we are not relying solely on it, I think that is a big mistake that a lot of traders make. Let’s look at some of the big ones and some of the smaller ones I prefer to use. Moving averages, what it is first of all, choosing a length and how we can use it in our trading. We have got something called relative strength index, or RSI, how we use this is called an oscillating indicator. Stochastic very similar to RSI but the mistake that people make with this tool, I think if you understand this mistake then you can avoid some of the horrible losing trades that people get sucked into.
Bollinger Bands and Keltner Channels, this is a great little tool for filtering out some losing trades and not getting caught in markets unnecessarily. Then I am going to move to Average True Range (ATR) and this is a fantastic little tool for understanding the market’s volatility, how you can use this to generate your stops, you can use it to get into trades or out of trades. The big one that people tend to neglect is just volume, understanding their participants and using the right indicator for the right market. As I went back to the very early slides, trending market, range bound markets, understanding the difference between the two. They are not the same, this is when indicators come into their own, you know you have got to use the right indicator for the right job.
Understanding the strengths and weaknesses of an indicator.
Before we look at some chart examples, it is important to note that every single indicator is derived purely from price, maybe volume, maybe time. Everything that we see on our chart, an indicator is just doing that maybe it is taking an average, it is adding some sort of calculation to that raw data to give us and indicator value.
So, let’s look at moving averages on a chart.
What Is A Moving Average? – Understanding Moving Average Settings
So, a moving average is very, very simple. You have different types of moving averages, in terms of sometimes, you have a simple moving average or an exponential moving average. They are very, very similar and you don’t need to get worried about them too much. The most important thing to know about a moving average is the length of the moving average determines how it is calculated. I have two moving averages loaded up on my chart here now.
What I am going to do is I am going to show you a couple of them. I have put on here a 20-period moving average, now what that is doing is that is showing me the average price over the last 20 periods. I have got a daily chart up here, don’t forget the period means whichever timeframe chart you have got loaded up, so I have a daily chart loaded up here and I have a 20-period moving average. This line here which is the blue line, lets thicken it up a little bit so we can see for this, nice thick blue line. That is plotting the average price for the last 20 days. You can see it basically lags price, but it just shows you, it just smooths out price. If you didn’t have a price on there at all you just get an average view and you don’t get to see the highs and lows, you just get to see how the market has ebbed and flowed over that day. That is a 20 period, if I was to move this to a 200 period, obviously, that is going to show me the average of the last 200 days, much smoother average. The higher number you go, the more days you are taking into account the smoother it is going to be. Then you can go right down to whatever you want, obviously, you can adjust it to whatever you want, a 5 period, which is going to give me really tight average of the past five days and there are some strategies we can use from that.
Generally speaking, people are going to use a 20 period, they are going to use 50 period and they are going to use 100 and 200, it just depends on what you are trying to achieve. Obviously then if you go down to let’s say a one minute chart you can still use the same thing and say you are using a 50 period as we are now, that is basically giving you the average price over the last 50 minutes or the price over the last ten minutes whatever you have that set at. It is multiplied by the timeframe setting you have got on your chart. Very useful for seeing just a general trend of the market and a lot of people like to look and see whether the price is above or below, some people have a strategy where they will sell if the price crosses below moving average and buy if a price crosses above it. Another way of doing it is to have two moving averages on your chart.
So, lets thicken this up a little bit, this one is a five but let’s make it a 10 and let’s make it a little bit thick so we can see it. You can see now, some people use several moving averages to judge, to filter out their trades, they might say for example okay we have got a 50-period moving average here on our one minute chart and we have got a 10-period moving average, I will buy when the price, when the small moving average (the 10-period) crosses above the 50-period and I will sell when the moving average crosses back below. You can see that if you had done that then in this random example we just picked up here you are going to belong from this point here and then you are going to exit at this point here and if you were doing it strictly maybe you would go short as we broke under it and you would cover it as we broke up through it, so now you are getting to a point where you may be taking a trade right this instance. That is what a lot of people do, it is called a moving average crossover system and a lot of people do look at that.
They may not necessarily trade it as such but maybe they use it as a filter, so if we use say a 50-minute timeframe and we said okay while the moving average is below I am always going to look for shorts, sorry while the shorter period is below I am going to look for shorts, while it is above I am going to look for longs. There is plenty of permutations on that but it is just basically giving you an average price depending on what different parameters you are going to put in.
Later on, in the course I am going to show you a nice little strategy where I use the 20-period moving average to really get a grip of trends and get on the end of trends.
What Is The RSI Indicator? How To Best Use RSI (Relative Strength Index)
The next thing we are going to look at is the RSI.
Moving averages is what is called a trending indicator.
Actually, before we move on to the RSI, let me just explain that when the market is rangebound and choppy, moving averages are not going to help you much, because they are going to be tightly wound together even the short or longs are going to be tightly wound together, they are going to be crossing very frequently, they are going to give you false signals loads of the time. Let’s pop on something a bit thicker like the DAX, I prefer the DAX to the FTSE as personal preference.
The amount of times you end up crossing the larger timeframe moving average or the longer period moving average, you have got to be careful, the disadvantage of it is that if you are using it during choppy markets, you are going to get chopped up. However, the advantage is, if you can identify a trending market and then get on the end of it – let’s zoom out a little bit – then the moving average is going to help you time that trade because it is far cleaner the signals that you get as opposed to a choppy or rangebound market.
So, that is one word of caution with the moving average.
So, let’s take those off now and let’s put on the RSI, so we insert the indicator and as I say the link to this free charting package is at the end, very handy little charts. So, these are called what is known as oscillators, we have gone past it, RSI relative strength index, so, we put that on. Let’s just close these off so we can get a better glimpse of what is going on with this and let’s make it a nicer colour. I think that is probably not the best colour for us, shall we go with a nice white, thick line.
Yes, let’s do that.
Easy enough to put on as you can see. Now, RSI is basically – there is a reasonably complicated formula with it – but, ultimately it is giving us what is called over bought or oversold condition. It is trying to tell us if the market is stretched, so when the price goes above – and everyone has got their own parameters for this again – let’s put our daily because I think we will probably get a clearer picture here. When the price goes above 60/65 it is considered overbought, so if the market is oscillating back and forth it is going to go into an overbought situation and if we start to go down a lot very, very quickly – this is very simplified – if we go down very, very quickly quite a lot we are going to get an oversold condition where the RSI is going to go below 40. So, anything below 40 or below 30 is very oversold, above 70 is very overbought and the theory goes, is that when the market is overbought you are looking for it to roll back again so you are looking for short setups for the market to roll back down into sort of neutral condition where it is about 50.
So, as we stand now on the DAX, we are about 43 so we are pretty neutral, you know the beginning of August when we spiked right back up and had that good run we were very overbought and we unwound that condition by doing a bit of consolidating and now we are coming down a little bit and we have sort of gone into a little bit of neutral territory. If we run down very, very quickly we are going to go into oversold. So, that is the theory that goes with that. You are looking to trade against the move, for overbought you are looking to sell it, if we are oversold you are looking to buy it.
Also, before we move on to some of the strategies with that, you change your upper bands obviously 70/30, so you can choose where your overbought or oversold is.
Obviously the higher the band the less likely it is to get in there, get the RSI to 80 is pretty extreme, the lower the band obviously, the more signals you are going to get. So, if you bring that down from say 80 to 60, you are going to get more signals but they are going to be a little bit less reliable.
Settings wise again it is the length, it is the average, so here it has got a 14 period that tends to be good, the average. The default setting for most platforms, but for some guys prefer to have it a little bit shorter, so like on a 10 period and some guys prefer to have it long. Obviously, the shorter you are going to get more exaggerated moves, whoops, obviously, the longer period you are going to smooth out just like it was with the moving average. So, we are going to like a 50 period here, let’s go to the 40 or we will be here all day clicking it. Now, you can see it is much more smooth, the action. If we go back to one day, you can see how it is more smooth than narrowed down because it is taking more of an average. Obviously, if we do keep going and going over 100-day period we are going to get much more of an oversold or bought condition. So, that is how you use a moving average. Let’s go back to the default setting of 14. So, that is how you use the RSI.
Now, there are various strategies you use with this and I would recommend going onto google and looking at all the different ways of using this but I just want to tell you the disadvantage and advantages with it. A market can stay overbought or oversold for a long, long time, so, if you are thinking of buying every time we get oversold or selling every time we get overbought, you may well be in for a bit of a shock. Here is an example here, oversold condition, the lowest reading we have had for a while DAX moved down, we had a couple of days of up move before it went even lower, so just doing that on its own is a losing strategy because the market can go into a trend environment and this is what I say about using the right indicator for the right job.
If the market is trending an oscillator indicator like an RSI or like a Stochastic is going to be useless because you are just going to sit overbought for so long as the market just keeps going and going because it has gone into a trend mode. It is repricing its natural environment. Whereas if you have got a nice rangebound market, then that is when the oscillator comes into its own.
Now, another strategy that some people use, is they use what is called a divergence, so if the price goes to a new low but the oscillator doesn’t, so the RSI here fresh low didn’t go to a new low, see you have got a little bit of a positive divergence because the price has gone to a new low but the oscillator has not, some people take that as a sign that that is a bottom and they will buy from that.
It is not something I look at too much, but it is a tool nevertheless and it is a popular tool and one thing that I would say that you can use it for, is to say, listen I am trading my 5-minute chart I am not going to chase the market if it is overbought. So, if it is overbought I am not going to buy, so if you are not using it as a trading alert you can use it as a filter and say, listen we are very overbought at the moment anything above 60 I am not going to buy. What that will do is it will stop you chasing, if you have a tendency to chase the market and try and get involved and get panic as soon as the market highs and lows, that will stop you doing that.
So, it acts as a good filter and say listen I am only get involved when we are on a long side, when we are below 60 and on the short side when we are above 40, for example. That just might be a way you use it as a filter. Remember you don’t always have to use it as a complete trigger, you can use it as a filter.
What Are Stochastics Indicator? How Do I use Stochastics
The other thing I want to look at is a Stochastic, which is very, very similar to an RSI, it is an oscillator.
Again, you will want to have a look at the formula, have a look on google, someone will explain it far better than me. It is very, very similar again it is taking price and it is giving you a kind of overbought and oversold condition. It is considered that if we go over 80 it is overbought and that if we go below 20 or below 10 it is considered oversold. The difference with the stochastic and the RSI is that you have got different parameters, so you can smooth it out with an average. You basically have your actual period then you have a smoothing element which is called K & D and they will smooth it out for you and give you like an average over the stochastic. So, you can look at the actual raw stochastic value. Look, it is very overbought there or you can look at the smooth version and again some people take trades as it crosses below, back under into – from an overbought into a neutral condition. Some people use it as a filter, it is entirely up to you.
My recommendation with any of these things is to put it on your chart and just see if it is something you like, as opposed to going up and reading about a strategy just using an indicator, try and integrate it into your own trading. Just pure price is king, guys, pure price is what it is all about. All of these are derivatives of price, volume and time. So, if you can get a feel for how price moves, how price responds to your key levels, how price responds to support/resistance, etcetera, then that is going to really help you more than anything else will, more than any indicator will.
One thing that I find very, very useful is obviously volume, it is something that is often overlooked but it is so, so important. So, let me get rid of stochastics on here, let me stick a volume back on. Understanding how volume interacts with price is something that will come with experience but if you can think about the more participants that are involved in a market the better, generally speaking that is going to give you a clue as to whether a market is going to continue if it approaches new highs or it is going to run out of puff. What I am not going to go into absolute finite detail here because I don’t want to cloud your judgement and the way you look at volume. I recommend this go away put volume on your chart, just capnotic chart and volume, maybe have an ATR on there, maybe go with one moving average. Don’t clutter your charts up too much. So, just understand the relationship of price range, which is your average true range, volume and actual price, how it responds.
Don’t forget your time of day. So, note on your chart when the market opens, when their lunch time period is, when it closes, when the US session is opening if you are trading a European session. Don’t clutter yourself up with too much stuff, you just keep an eye on what is happening and how the relationship with price is with volume, with time, etcetera.
What Are Bollinger bands and Keltner channels? What Is The Difference Between Bollinger Bands and Keltner Channels
Let me run through Bollinger bands and Keltners.
Now, Bollinger bands and Keltners I like these, I don’t use these to make my trading decisions, however, they basically provide an envelope for price. They are very similar Bollinger band is based on a standard deviation, Keltner channel is based on an average true range. I personally prefer a Keltner channel, it doesn’t really matter, they do very similar things. What they are doing is they have an average price in the middle like a moving average and then around them you have an envelope based on a setting that you use. So, for Keltners I am going to use a 2.5 period or a 2 period and it is the same with Bollinger bands. They are going to give you a bracket to work around. The way that I use them is that if we are on a daily chart, I won’t chase price if we are at the upper band, you can see how often we tag the band and then that is it we roll back, or if we tag the lower band we don’t get much further we have to unwind a little bit, we have to retrace the mean, before we can get going.
So, if I am really interested in a market and it is right up a Bollinger band or up a Keltner, I am not going to go long, I am going to wait for it to at least retrace a little bit before I go long, because generally it will contain price, not always, you are going to get time periods where it does hug that upper Bollinger or lower Bollinger or upper Keltner or lower Keltner but I like to use it as a guide. I don’t use it so much on the lower timeframes, because you can stay out of it for such a long time, it is more powerful I think on the higher timeframes, like the 5 and the 15 minute, if you are day trading. So, you can see how it bounces up and down off the upper and lower Bollinger band.
Use it as a filter, it is a really great little tool, but as with all things I would recommend not clouding up your chart too much with it. Know where you are, where price is in relation to the Keltner channel and then take it off the screen. Say, okay with the lower Keltner now where am I going to get involved, okay I want to get involved short for example here, let me see it unwind, if it unwinds a little bit 20 ticks or so, I have got to know I have got a bit of downside, because the lower Keltner has given me a little bit of room to breathe. Obviously, if news comes out, forget it. It is going to rip through all these levels and it is just going to do its own thing, which is why supply demand is the most important thing. If there is massive supply coming in you are going to see the market fall through the floor regardless of what your indicators are saying. Similarly, if there is huge demand coming in it is just going to rip to highs, no one is going to care what any oscillators and moving averages, Keltner channels are saying. Of course, that is where the power of volume comes in because we can see that we are in new volume territory, fresh highs, good volume coming in, holding above, everything is looking very good.
So, those are just a few of the tools of the trade, there are hundreds and hundreds and it is all about finding the one that best fits your personality and fits your style. What I will say is this, I know traders who use different types of indicators, I know guys who have made very good sums of money trading from one or two indicators, I don’t know anybody who has made good money from using loads of different indicators. So, that tells you something, it is that you find an indicator that fits your personality/style and trading method and then you stick with that and you don’t try and cloud it with different indicators because what will happen is you will get conflicting signals, because your moving average says buy, your oscillator says sell and you don’t know where you are. You need some conviction.
What Is Average True Range (ATR)? How Do I Use ATR In Trading?
So, we have got the DAX up here, let me clear off some of these drawing objects here.
The first thing you notice that I have already got on my chart is volume, the low here I have got a volume to show me how much volume is traded during this time period and this is 5-minute chart. We can check that by just flicking there, yes, 5 minutes. So, each candle will show me 5 minutes.
Underneath it each volume stem is showing me how much volume is traded in that 5-minute period. The thing is with volume, is that when you are trading in index, you are basically getting a bit of a cumulative volume from the broker, the actual true volume comes from the futures market as we talked about before. These brokers are mirroring the actual market; the true volume comes from the futures market, but, if we looked at something like, let’s have a quick tesla for example, okay, now that volume is going to be true and it is going to show us how many shares are traded during that 5-minute time period and you can see how you know we have got a bit of a spike in volume and then it goes lower during lunch time, pushes back up and that is how the volume tends to go. We get volume spikes as we go through highs and go through lows but it is very important to see volume because it understands how many people are participating, if we pushed through a fresh low and no volume is coming in that is a little sign that is telling us hey you know what there is not a lot of participants in here maybe we need to be a little bit cautious about getting involved in a breakout.
Or volume is very, very low there is not a lot of participants during lunch time I am not going to get involved. Or volume has gone through the roof, it is the biggest volume we have had for the week, hey there is a lot of interest here let’s look and see if we can generate a trade opportunity.
So, always looking at volume is key.
Understanding the relationship between volume and price, that just comes with experience, as you start to look at the charts and looking at trade.
How does volume pick up? How does it decline? How does it contract? How does it expand?
Then below that I have got average true range and I have skipped a bit because we were going to talk about moving averages, but we might as well talk about this as it is on my chart. Now, for me this is just showing me the range of this bar, what you can do and what a lot of traders do and what I will do is I will adjust it to give me a different time period. So, let’s double click it and then we can adjust it. At the moment, I have got a length of 1 but let’s say I wanted to see the average of volume over the time period. Now, don’t forget okay I have got a 5-minute chart here, so if I put in an average length of 10, what that is going to do and it is the same with all indicators, it is going to take 10 periods of the chart time frame I have got. So, I have got a 5-minute chart, so it is going to take 50 minutes and it is going to average the range over 50 minutes for each of those and it is going to give me a statistic. So, you can see how the average is smooth out and it picks up a little bit here as we start to, it takes a little bit of time obviously to represent in the indicator because it is an average, but as we start to put in a little bit more range in each of our candles, the average true range is going to pick up.
So, what that does is it starts to give us a picture on the volatility, you can see very large volatility during this Brexit situation here in late June and then as we are bouncing off and we are just getting the questions answered are we going to go to lows or not. Good volatility is similarly back at the beginning of the year when we started to push lower there was that good volatility and the ATR was lifting up but, do you know what the parameter you use is entirely up to you. I like to use 1 for purposes of just seeing what has gone on, I want to see what the range is like and then I can compare that to the prior days, so I can see hey you know what the last few days we have had pretty much no range after we had that big move to the downside.
So, I can think maybe we are going breakout of the range. So, the average true range is a great way of recognising volatility at a glance using whatever timeframe chart you want and one thing you can also do, a little tip here, is you can start to put your stops based on the average true range. So, you can start to look and say okay well I am either going to use a 5 period average true range on my 1 minute, so let’s put it to 5 and I am going to say what is that running at at the moment, it is running at – what have we got here – 2.4, so , it is telling me that we are really not doing an awful lot guys, we are – the average range 4/5/6 – so, what I can say is okay let me look at the peak of that which is about 5 points.
If I am going to be scalping, then maybe I can use twice that at 10 points and I am going to be safe. So, if I am wring I know that unless we have a really big move, I am not going to get stopped out. So, it is a way of kind of framing the trade.
What Are The Key Events Which Affect The Markets? Economic Data, Earnings, News
So we have got a lot of events which affect the markets. We have economic data that is scheduled, we have companies releasing earnings, we have harvest inventories, breaking news. Let’s have a look at each one.
Ok, so, economic data and I’m going to include a link again in the tools section of this course, it’s a free section where you can get your calendar. Now we have things that come out regularly like interest rates announcements every month, we have jobs reports, cpi, ppi, inflation baskets, we have manufacturing from factories and this stuff comes out every day.
It may be scheduled every week or every month depending on what the data is but, the important thing for us as traders is we make sure we understand where the risk is coming from during that day and avoid it because, what we don’t want to do is have a position on when we know we have a big jobs number coming up. So we have got a long on the FTSE, and we know there is a big jobs report coming up in the next ten minutes it’s probably prudent to take the position off or be prepared to sit through what could be wild volatility. So this is why we are always looking at our calendar in the day or in the week or in the month, to see what could affect the markets.
Now obviously, each country has its own announcements, in the US we have got FED, in the UK we have the Bank of England, and we have different economic reports coming out for each country and they are going to affect things like the index of that country, the currency of that country, and then broadly oversee the stocks.
Now stocks specific, we have earnings, obviously, companies release earnings to tell you how they are getting on and we have got those quarterly. We have interim reports, we have management news. So if you are long, let’s say Facebook, and you are thinking of holding the stock overnight, you need to be sure they haven’t got a scheduled announcement because the problem you have if you are trading stocks and holding overnight, is, that once that market is closed you can’t adjust your position at all.
You’ve let go of full control of your risk and whatever happens, happens. Now let’s say the company comes out and warns they have made a massive, they have missed their profit targets, the next day that stock is going to gap significantly lower. Now that’s fine if you are sure, but if you are wrong obviously that’s going hurt. So, understanding where the risk of the market your trade is coming from, what’s your daily event risk, and also knowing what people are waiting for in the market.
If we were a day before some really, really, key economic data then perhaps the day is going to be quiet because everyone is waiting for that data. So understanding that and recognising how that’s going to affect the market you are going to trade.
The other thing is the harvesting inventories, we have got what is called crude oil and natural gas inventories which tells people how much we have got in stock. Now, that’s not so important sometimes because it becomes irrelevant but let’s say everybody’s looking at crude oil. We had a period a few years ago where it was very, very, important and people wanted to know how much crude oil we had in stock and how much was being pumped out, and all this stuff because it determined the price of crude oil.
Obviously the more scarce a commodity is, the higher the price and if demand is going up, there’s not much of it about. You get a little bit of panic and people start paying more and more and more for it. The same with natural gas and it goes in swings and ebbs and flows, depending on how volatile or how much volume is flowing through the market and then obviously we have things in the soft commodities like the harvests and we get those reports; and there’s a great website for that, again I will include that at the end but in addition to that we have to prepare ourselves for breaking news, so unexpected world changing news and it does come along.
We have Brexit, now it wasn’t unexpected, we knew that there was a vote in the British citizens were going to vote but the outcome was unexpected. So there’s always that surprise from unexpected scheduled news. Then we have the unfortunate things like terrorism and deaths.
So if a world leader was to die, that is going to affect a market, because people are going to think, oh do you know what, now the country doesn’t have a leader we may well be in a bit of turmoil. Is that going to do the economy any good? Terrorism, we had the unfortunate attacks, less so now the market seems to react less, but if you go back to the 9/11 events, obviously the market was devastated, it didn’t know what was going on. The uncertainty caused that crash. We have technology breakthrough. So if there is a better way of getting or extracting oil out of the ground, then people extrapolate that and say well actually oil may well be more abundant, this is going to be, put a bit of pressure on price, or maybe there is a better way of communicating, or whatever it may be.
You know there is always something that could affect the market or could affect your specific stock. On contracts, you have got surprise contract, let’s say with a company, they suddenly sign a huge company making contract with another supplier, then that’s obviously going to affect the price of your company.
So the key take away from this is, understanding what is going to affect the marketthat you are trading, what is going to move the market and knowing where your risk is coming from.
The key point of being a trader is that you are managing risk, you have got stock loss in, you know when you are going to come out of the position, you are not taking on open ended risk and this just shows you here this graph, shows you how news affects all markets.
I’m going to put specifically ones in focus because there are markets that are in focus for a few months at a time and then it’s the next market, then it’s the next market and its understanding what is driving that, trader focus and if we look at Europe, news coming out of Europe, is going to affect the FTSE, the DAX, the Euro, the Pound, the CAC; which is the French stock exchange and the Swiss Franc, just to summarise some of them and if we move over to America, we have got obviously any news coming out of there is going to affect the DOW, the S&P 500, the NASDAQ, the dollar, gold, potentially oil, Canadian dollar, depending on which country we are looking at.
So, and there also will be a knock on effect to Europe.So if we have very poor economic data coming out in the US that’s unexpected, the DOW, the S&P, the NASDAQ, are going to take hits, to the downside and that will knock on effect the DAX and the FTSE. So its understanding the relationship between those and similarly in Asia, we have got Asia and Australia, we have got Nikkei, Hang Seng; which is Hong Kong, Yen; the currency in Japan, the Australian dollar, the Australian index and the SSE. So these are again going to, information coming out from these countries is going to directly affect those but if there is, if it’s very important, like we have China news coming out, it maybe will affect both US and Europe if it is completely unexpected and a complete potential game changer.
So understanding their relationship of how global news flow affects each other currencies and each other’s industries. Obviously the more impact is going to be on the immediate one, but there is definitely that knock on effect.
A Powerful Spreadbetting Trading Strategy
Alright, so let’s move on to some Trading Strategies.
Now what I’ve done is I have focused on one specific strategy and I’m going to explain this in some depth. This is a strategy that I use, I implemented this around ten, eleven years ago and I’m still using it today. It’s a very, very, powerful strategy. Now this is three strategies for joining an intraday trend. Now this is a day trade strategy, and it’s very much designed for jumping on board a really strong move. It doesn’t happen every day, we don’t get these strong moves every day, but when they do, we want to get on board it for a continuation of the move.
So let’s look at the four criteria that we have for this strategy
Number 1, we want a good drive in one direction on good volume. So, we have got a strong move up, volume is high and its moved a good decent direction, good number of ticks, preferably, taking out some key levels or with a key level acting as a magnet, what do I mean by that? So let’s say we had a resistance level here, we have talked about our resistance level, we breakthrough that, we keep going and its very, very strong, it’s a good drive, its taking out a key level. Or we have a really significant level up here, that it hasn’t quite tagged and that’s acting like a magnet, sucking the price towards it, let’s say that’s a magic level of like a 100 or something let’s say it’s the prior days, high or whatever it may be but something that’s hauling that price towards it.
So a nice solid drive, taking out some key levels. Those are the first two criteria.
Number 3, what happens is the market now starts to pull back for a few minutes, moving in a counter trend direction so we get this little tiny move against the trend and these candles should be relatively small compared to the size of the up candles, so look how strong these candles are, boom, boom, boom, three solid ones, really good moves and then we get a little tiny pullback those three candles are about the size of the last candle. So the very volume is drying up and that’s showing us one thing, it’s showing us the volume is coming in on the drive, good strong volume, volume isn’t that interested, or traders aren’t that interested on this pull back.
So not many sellers are coming in so if we look at the supply and demand like see-saw that we had before we can say that bang, there is a massive demand coming in. Supply is very, very, small, nothing much happening, then we sort of equalise a little bit, the demand backs off supply stays the same, but its slightly in the balance of supply, so we get a little bit of a drift lower and then what we are looking for is to find a place to get back on it for a further move, ok, that’s the train. It’s buying on this pull back, looking for a further move, to highs.
So those are our criteria, on one a good drive in one direction, good volume.
This can be up or down by the way, I’m choosing an example of up. Preferably taking out some key levels, ripping through those good levels or as level above it acting like a madman.
Number 3, the market starts to pull back for a few minutes, strategy in a counter trend direction, very, very, subtly, very, very, quietly not a big move and then finally those candles on the pullback should be relatively small compared to the size of the drive candles.
So really not that much interest in this pull back.
Spreadbetting Trend Trading Strategies – Joining The Trend
Ok, so, now, how do we get on the trend?
We have discovered, we have filtered out what is a trend in this Strategies Criteria, good move, shallow pull back etc.
How do we get on it? Well there is three ways of doing it.
Number 1 is the 20 period exponential moving average method or SMA, or whatever moving average method. The theory of this is we buy as the price touches that 20 period moving average, this is on a one-minute chart by the way guys, after your trade criteria is met, and we saw those on the earlier slide.
Number 2, the wick method.
We talked about how a candlestick is formed so what we want to do, is, we are looking for a good wick to form and we are taking a trade on the close of that bar. So if we get the pullback, we then see a candle which forms like this, in other words we push the lows, we change direction pretty much straight away, in the one minute, we are looking to buy after the close of that one-minute period. That’s very structured, very focused, that’s very fixed, there is no room for ambiguity on that and number 3 is the small trend line method.
We wait for a break of the small down trend line to the upside. So if this is our down trend, and we drew our trend line as we did earlier on, we wait for a break of this here and we are buying that move to the upside.
Anyway let’s have a look at some little examples on charts and we can visualise it a little bit better. Ok, so here’s some that we have just pulled out. The 20 period moving average, we know what know what a moving average is, we have that on a one-minute chart. We have a drive lower, we have a consolidation, and we look at this example here, you can see we have a little wick to the upside, or a little tail or whatever you want to call it that’s popped through that 20 period moving average, its tagged it, just touched it. So we have got both criteria met there and then we get the down drive. So it’s a nice short trade on that one.
Similarly, here you can see we have had a good drive lower, heavy volume, I haven’t put the volume on this chart but I wouldn’t have picked it out if we didn’t have it. The 20 period moving average is catching up, price comes up, touches it, we form that little tail, that little wick, then we rollover straight away. Very nice trade set up there.
Now, and that’s just from the 20 year main tag and the wick. They don’t have to be both together, but these examples just show when you have got two together the power is there. Now this line is what is trend line break and a wick. So in other words, what we do is we look for the good drive high, and there’s multiple ones here.
We have got a good drive higher, we start to pull back, not really encroaching into the drive territory. And then we take another leg higher, pushes up, little pull back here. This is probably the best example of it. A good drive higher, it will pull back and we take it on the break of that trend line. We take it on the break of the trend line in the direction of the trend.
It’s a really nice way of getting on those trending moves.
Spreadbetting Trend Trading Strategy -Stops and Targets
Ok, so, timing the trade, we have just talked about the three ways of getting on board that trade. Number one is we draw a small trend line, that’s going to draw anything out, so we draw that trend line, so there’s the counter trend move, there’s the drive, this is the trend line we draw with our drawing tool. Then as the prices breaks that we are looking to go long at that point. Great, we know what that’s all about.
The other method or the other way of adding to this is that we look at what our moving average, our 20 period catch up to it in a perfect world that catches up to price, that just gives it a spring board, an ability to just drive off that, very lovely when we get that type of scenario and then the final thing is we wait for a, (let me just change the colour on the pen) we wait for a little wick to form on our candle, so there’s our candle.
If we get a wick to the downside it means that price has changed direction in that one-minute period and it gives us a marker to trade against, because if we get that and we take a long, we know that we can put a stop below the low and I’ve also mentioned here about a little bit of watching institutional buyers telling us that’s a little bit more advanced and something that can come later on, we don’t want to go into that now. I want to keep things simple and clear but something we can do.
So an important aspect of this is risk management. Where is our stop position?
Now it’s a big thing with training, we want to make sure that we do not take on more risk than necessary, but at the same time we need to give the market room to breathe. So, the stock position is going to depend on the strength of the move. We are obviously not going to take this trade if it’s a quiet drift up higher, that’s not the point of the trade, we need that very strong move and the stronger the move the tighter the stock. Because, if we think of a supply and demand imbalance, the see-saw type effect. If we are well out of balance, and we know hey the buyers are just monstering this market up, they are pushing it higher. Any little retracement is going to be bought straight away, we can afford to use a tight stock and I love those scenarios, where the balance is so out of sync, that we get the opportunity to get in on an aggressive trade, looking for another leg higher.
If it’s a good move, but it’s not really a massive move, but it’s still good and it still past the trade criteria but doesn’t really drive us aggressively, we are going to have to give ourselves a little bit more room. Don’t forget the point of a stop is it takes us out of a trade when we are wrong with our trade thesis or our trade premise. It doesn’t take us out of the trade just based on noise.
So, the important thing with this, is that don’t be afraid to take a small stop and re-enter when price action confirms. You don’t want to be caught out on this sort of thing, a v shaped reversal.
So if you have taken you are going to pull back the prices, then broken above that trend line, they have gone wrong. Put your stop under there, come out, reassess it.
I always use the low or high of the counter trend move plus or minus a few ticks as my stock. That’s why a wick or a tail is so good, because when you get that move back up in the direction of the trend, after you have had the counter trend move, you can use that low to lean on as your obvious stop position and definitely always come out of it and look to reassess, you don’t want to be caught out in that v shaped reversal as I say.
So, always recognising that it’s important to manage the risk.
So, where do we put our targets for this trade?
We know we are looking for a drive, a pull back, we have got our stop position with our target. Now if you are right on this trade, you are at least going to retest that last swing point. Whether it’s a higher or lower, higher with obviously an uptrend, lower on a down trend. So, that’s a good place that you can, use a risk off point.
What I mean by a risk off point, I’m talking about scaling. So if you are in let’s say a £4 per point, and the market moves back to test that high, you can take off two, you can leave two on, you don’t have to take all of your position on or off at the same time. You can scale in that position. So, scale out as the market comes up to that point, take two pounds a point off, you have got half the position on. Now, you are in a little bit more of a comfortable position. You can scale as the market drives even higher. So as it pushes higher, you scale off another one. As it gets momentum and really pushes, and get those extreme moves, you scale off another one. That is how you work your trade, not all in or all out, scaling into to those pulses and it’s good because what you are doing is you are taking the other side of traders getting stopped out.
The guys who were short and are caught on the wrong end of the move and its driving higher you can sell it to those guys, because they have got a sale stop, obviously because they are short. Having to buy stock because they are short and it’s causing a little bit more panic, a bit more momentum, utilise that to your advantage. Scale out your long trading to those and also, its important, extra thing to note here it can often be the start of a very strong move.
So if everything is lining up nicely, it’s a good time to look for those extended key levels that you did mark off pre market, we talked about looking at higher time frames and say you know what, this is a big move.
We have bounced off the lows aggressively, we have got a good move, it’s the first pullback, I, we could close on highs for the day. I need to consider whether I should be holding my trade for the rest of the day and letting the market pay me.
There’s no right or wrong way for this, but this is something you need to look at as a trader and assess the situation individually.
Filtering The Trade
Choosing The Best Spreadbetting Trading Tools, Broker and Resources
You are only as good as the tools you are using and that applies whether you are a mechanic, whether you are a bricklayer, whatever it may be and it equally applies if you are a trader too.
You need to have the right tools for the job.
So let’s have a little brief overview of talking about trading resources, brokers, charts and tools.
Now, picking the right broker. This is so, so, important. At the end, again at the tools section I’m going to give you all the information about my recommended brokers.
I’m going to give you access to the charts, economic calendars, news flow, books, lists, everything you need on there and it’s updated regularly so make sure you check that out.
Now broker selection, you have got a couple of things you need to make sure that you take into account. Number 1 is the reputation of the broker, has it got a good reputation. Now don’t look at just reviews on it, because a lot of traders unfortunately are losing money and they are blaming the broker. Look at it in terms of how long has it been going? Has it been going a long time?
A longer time broker understands how to manage risk, understands how to manage clients, they have got good technology to back themselves up. They have hopefully got a lot of cash in the bank to weather any storms. Good brokers are listed on the stock exchange too. Security, so, have they got that security that keeps your data safe and keeps your money safe.
Now in the UK you are protected to a certain extent, against a broker going bust, but it’s a hassle, believe me. I’ve been there done that.
You need to have a good broker and also, just going on the issue of longevity and security and a reputation, I know somebody who had a new broker, he got involved with it, he made some money and then the broker, it turned out that actually he wasn’t based in the UK, he was based abroad and it was very, very, difficult to get his money back, and he did not get all of his money back.
So, be very cautious, as trading is hard enough without having to worry about brokers and the executions. You want a trader that’s got good spreads, good tight spreads, most of them have but if you go to an obscure one then you are not going to get it. Especially ones I recommend they have all got tight spreads and they have all got this, all reputation, security, tight spreads. You want a good range of markets. Yes, you are going to focus on one or two markets that really interest you, that you are really good at and want to get good at but, it’s nice to have that extra range of markets to trade because it gives you the opportunity, if the opportunity presents itself, then you want to be able to trade that market.
So a nice range and also platforms, a nice desktop platform, easy to navigate, nice clear tickets, easy to bring things up. In addition, it’s a great benefit if you have got an app for your phone or tablet, because we don’t want to be glued in front of the screens all day long and sometimes we want to be able to monitor markets while we are out and about and in certain circumstances, we can trade if we need to, from the app, I wouldn’t recommend doing that as such but if there is a level you want to trade, or if there is something you want to do specifically, then having that ability is far easier than making a phone call.
You can get the charts as well, you can look at charts on your app as well, so if you are waiting for something you can have a little look through some charts. So, it’s very, very, important, in fact it’s one of the most important things to make sure you have got a reputable secure, solid broker behind you.
A little tip here guys, is have a couple of brokers, have two or three. It costs nothing most of the time to open up an account, you can put a little bit of money in, but you have got that redundancy then. If one goes down, it’s a failure, you can move straight to the other one to trade. If you can head yourself off, it’s so important to have multiple brokers and they don’t normally charge you a fee for having an account open. So there is no reason not to.
You don’t have to have loads of money stored in them, just enough so you have got the ability to trade and most of the time if you need to get money into them quickly you can do so via a debit or credit card. So, you don’t need to have loads of money, you can have a couple of accounts there, then if you do have to trade, you can get in within 5 minutes or so.
Other must haves, you must have good charts.
The brokers provide ok charts and they are fine but you know I have got a link to some free ones that are much much better. They give you far more detail. You get volume weighed, average prices you get all the indicators you can put on. It’s so much more powerful having good charts, it just helps you make your decision making process better. If you can flick through different prices different markets, different timeframes really easily with the stroke of a key, stroke of a mouse, it’s going to make your life so much easier. You need access to the economic calendar and company schedule.
Again I will include a link for that. News flow; I don’t think you need premium news, but sometimes I think it pays to be abreast of what’s going on. Just to see what traders are looking at, you don’t have to be an expert in the news but if you know that crude oil or Japanese Yen or Europe is in focus at the moment then maybe you can divert your attention to those markets.
Good books, always to become a good trader you have to study.
I’ve got an ever increasing list of those and I will add those as we go along and always happy to take recommendations from people who have read stuff and they recommend it. I will add those to the list but studying, not just necessarily studying strategy, studying mind-set, studying discipline, seeing what other traders have done and there is some great books and resources out there and then you have got other tools that you may or may not need, so stock screen is another one for stocks that match your criteria.
Some sort of alerts that send alerts to your phone or your email, you know these kind of things you can add on as and when you find a reason for them or a requirement for them in your training. The great thing about this day and age, 2016, is that, there is so many tools out there. A lot of them are free or very, very, cheap.
You know 10 years ago or 15 years ago, these tools and resources were so expensive, now they are relatively cheap if not free, so it’s great, you can pick and choose what you want that’s going to help you with your trading.
Now you’re ready to get yourself setup with the right trading tools for the job
If you are brand new to trading, the first thing you need are charts and access to market data so you can see the prices of popular trading markets like the GBPUSD, USDJPY, EURO, FTSE, DOW, DAX, Oil, Gold in realtime.
This is so you can get a feel for how everything works, how markets move and get used to watching prices on a chart. Many traders use charts to make trading decisions so getting a good understanding of how they work early on is key.
The trick is to open a DEMO account with a broker at no cost and use their charts and market data for free. They are hoping you’ll love the platform so much that you’ll deposit some funds later but you’re under no obligation. Stay on demo as long as you need.
Click the broker link below and scroll down to the OPEN DEMO button.
IG is the biggest firm of it’s kind in the UK and they have good charts, a huge selection of markets to trade and nice extra features like guaranteed stops which you can use to limit your risk in a trade.
Once you have access to your demo you can start to watch the markets of your choice.
Popular markets to watch are
EURUSD, GBPUSD, USDJPY, EURJPY, AUDUSD
FTSE 100, DAX, DOW, NASDAQ
Gold, Oil, Silver
That’s enough to get started with. Pick say 5 markets max to watch and lean how they move and trade day to day, week to week. Once you start to get a feel for them you can start to plan a trading strategy based on patterns you see.
Remember that trading is very very risky and you are highly likely to lose your money. You could lose more than your initial investment in some circumstances so take professional advice before trading with real money. Only risk what you can afford to lose.
PS: If you already have a broker it’s always prudent to open an additional account with other brokers for emergencies or opportunities in other markets.
An alternative or backup is this popular firm ETX