johnsbe, Author at Spread Betting Examples

Fibonacci Arcs

In the spread betting example below you can see how the Fibonacci levels are used in a form of Fibonacci Arcs. As you can see the Arcs are the projection of the Fibonacci levels: 38.2% 50% and 61.8%

In the spread betting strategy below the 38.2% retracement and the 61.8% retracement proved to be strong support and resistance areas in King fisher.

The Fibonacci Arcs are applied in the same way the Fibonacci retracements are applied. Draw the line from the highest to the lowest point then the projections will show the retracement points. These arcs can be applied also to spread betting stocks, Indices, commodities and bonds.

Spread betting example of the Fibonacci Arcs applied to King fisher stock

Next Fibonacci Fans

Fibonacci

Fibonacci Retracements are ratios used to identify potential reversal levels. Trader’s use these to predict where support or resistance levels are. The most popular Fibonacci Retracements are 61.8% and 38.2%.

Fibonacci numbers were identified by Leonardo Fibonacci, represent ratios that naturally occurred in Nature. Fibonacci numbers are simply a series of numbers that when you add the previous two numbers you come up with the next number in the sequence. Here is an example: 1, 2, 3, 5, 8, 13, 21, 34, 55

1 + 2 = 3; 2 + 3 = 5;

The main ratio also known as the Golden Ratio or PHI is 1.618 or the inverse 0.618. (calculated: number divided by the previous number approximates 1.618 55/34 = 1.618 or the other way round 34/55 = 0.618). Fibonacci numbers occur in nature and in the various markets as Forex, Stocks, Indices and commodities. There are many tools that incorporate the Fibonacci levels:

Fibonacci Retracements
Fibonacci Arcs
Fibonacci Fans
Fibonacci Time Extensions

Fibonacci Retracements

The Fibonacci retracement tool is the most popular tool used applying the Fibonacci levels. To use the tool, just place the high and low on the highest point and the lowest point of the move, with the 0 at the extreme point of the move. The Fibonacci retracement tool will then project the retracement levels, as you can see in the spread betting example above.

In the graph above of the Spread betting index FTSE 100, you can see various levels projected which have become resistance while the FTSE was retracing it’s downward movement. Here is a spread betting strategy where the resistance areas where the FTSE Index stalled and retraced and presented itself as good trading opportunities are: 23.6% to 38.2% to a strong 50% then to 61.8%.

Once one resistance broke, this level then becomes support. Note in the spread betting example how 23.6% was initially resistance then became support, the same with the 50% level which became support and 61.8% resistance.

Next: Fibonacci Arcs

Bollinger Bands breakout strategy (the squeeze)

Now we will show you completely the opposite of what we showed you earlier. This is a Bollinger band breakout strategy. This spread betting strategy works especially when prices have been trading in a range and there has been no decision on direction. Then suddenly they move either lower or higher and break out of the range.

The Squeeze: This strategy is also known as the squeeze, as prices will start trading in a range before the breakout, the Bollinger upper band and lower band will squeeze

Look at the spread betting example of Xstrata (XTA.L) below:

Bollinger Band Break out – LONG

Traders trade the prices long when prices have gone into a rage or consolidation, the bands squeeze and prices break to the upside closing above the bands.

Bollinger Band Break out – SHORT

on the other hand a short occurs when prices break out of the squeeze to the downside closing below the bands. In this case, as we can see the spread betting example above, Xstrata broke it’s range to the downside, the prices closed below the band and the prices continued lower.

How to control your risk. This depends on your risk tolerance. Some traders, with a higher risk tolerance put their stop above the range, others with a lower risk tolerance would put their stop loss just above the middle of the band

Measuring the strength of a trend

This same method can be used to measure the strength of a trend. Once the break out occurs and prices remain in the top half or bottom half of the Bollinger Band. Not crossing the middle line, this indicates that the strength of the trend is strong and it likely to continue.

Previous: Bollinger Bands Mean reversion

Bollinger Bands mean reversion strategy

As we stated in our previous page the Bollinger Band is created by two bands around the 20 moving average centre line, and these two bands are the 2 standard deviation. In statistics, the 2 standard deviation contains 95.4% of the price movement. Normally, the price will move away from the centre line towards the extremes and then snap back to the middle (The mean) like an elastic band. This snapping back is a “mean reverting strategy”. So when to spread bet long or short?

Mean reverting Spread Betting strategy

Long:

When the prices move down towards the lower band, this is when spread traders will either go long to open a new position or buy to close out their short position.

Short:

When the prices move up towards the upper band, this is when spread betters will either go short to open a new position or sell to close out their long position.

Below is a spread betting example of Xstrata (XTA.l) and how to trade the bands:

The bands can be traded in many ways, above I have showed you a spread betting strategy, on the next page I will show you something completely opposite. When trading this mean reverting spread betting strategy, aggressive traders would enter as soon as the prices touch the bands, instead less aggressive spread traders would wait for the prices to turn around look for a candle that closes in the direction they want to trade, then take the trade.

For example, (in a long trade) when prices are falling a less aggressive trader would look for the prices to touch the lower band and the next candle to finish up not down, above the band. Then the trader would enter the trade long, following a long spread betting strategy.

Closing your trade. Some spread traders will close the trade when it reaches the mean (middle line – 20 MA) others will wait for the prices to reach the above band. This all depends on your risk tolerance

Next, as we said we will show you the complete opposite.

Next: Bollinger Bands breakout strategy

Previous: The Bollinger bands

Bollinger Bands

Bollinger bands are a measurement of volatility. This is a very popular indicator created by John Bollinger. They can be used in many different ways. These are created by measuring the 2 standard deviation from a 20 day moving average of the price.They have three part to this technical indicator:

The moving average: This is the 20 day simple moving average of the prices

The lower band: The lower band is simple moving average minus the 2 standard deviation. therefore located below the middle band.

The upper band:The upper band is simple moving average plus the 2 standard deviation. therefore located above the middle band.

Here is an example of the Bollinger band. We have taken our spread betting graph of the WTI Crude oil:

Now lets look at how the Bollinger Bands are used in the various spread betting strategies:

Next: Bollinger Bands mean reversion strategy

Parabolic SAR

The Parabolic Time/Price System or better known as the Parabolic SAR is an entry and exit system created by J.Wells Wilder. SAR = “Stop and Reverse” .

It combines price and time components to generate your spread betting long or short signals. The Parabolic SAR adapts to the change. It is also an effective tool to determine where to place your stop loss.

Long Spread Trading Signal

When to take a long spreadbetting strategy? When the candle finishes above the Parabolic SAR and the Parabolic SAR indicator changes from being above the price to being below the price. The Parabolic SAR indicator was used as a stop and reversal trading strategy, where you would not close your position but would turn it around from a long to a short trading. The Parabolic SAR Indicator can be applied to Forex, stocks, indices,

Short Spread Trading Signal

Opposite to your long trading strategy, When the candle finishes below the Parabolic SAR and the Parabolic SAR indicator changes from being below the price to being above the price, this is the signal to go spreadbet short.

Now the next page will show you how the Parabolic SAR is extremely useful for knowing where to place your stop loss.

Next: Parabolic SAR Stop loss

Parabolic SAR Stop loss

As we mentioned earlier the Parabolic SAR Technical Indicator can function as an area where to place your stoploss, this is both to protect your wins while the trend increases or to minimize your loss when the trend goes against you.

The Effectiveness of the Parabolic SAR as a stop loss tool:

1) Initial stop loss

As the market turns around the Parabolic SAR indicates where to place your initial stop loss above or below the stock, indices, commodities trading price. This is placed according to your spread betting strategy, as in the spread betting example above.

2) Trailing stop loss

As the stock, indices, commodities trading price moves higher so does the Parabolic SAR, as it is an adaptive indicator that follows the price trend. It has an Acceleration Factor of 0.02, that is, as prices move higher so does the Parabolic SAR. This giving new levels where to put your stop loss.

3) Protective Stop and Time stop

as the prices move against you, you have protected your profits.

We said the Parabolic SAR indicator is also a Time stop, as time goes by and the prices move higher until they stop behaving as they should, the Parabolic SAR moves closer and closer until it changes direction, letting you out of the trade. thus time is a big factor too in the Parabolic SAR indicator.

This is good spread betting tool to add to your spread trading bag of indicators.

ZigZag – Practicle use

Not many spread betting platforms offer the ZIGZAG, but if you find it it does help in your analysis and projection. Example many Elliot wave chartists could use the ZigZag line to filter out noise when doing their count. The ZigZag settings to be applied is subjective o the individual doing the count, and how sensitive his count is to the price action.

As you can see from the chart above we have used the ZigZag Line to filter out just then main movements.

Filtering out Support and Resistance:

In the S&P 500 spread betting example, the Zig Zag line has filtered out support and resistance. We have used a 5% filter, therefore only when the spreadbetting price moves more than 5% will it determine important areas of price reversal or price continuation. Below I have pointed out the break of support.

After the price found new support it started forming an ascending channel that was eventually broken to the downside and the support line became new resistance.

as you can see the ZigZag Line has helped also identify patterns. as in this case and ascending channel.

to see how effective the ZigZag line is, look to the left of the triple top pattern. Can you see how effective the ZigZag Line was in maintaining you in a long spreadtrade, which would have allowed you to run your trade all the way to the top of the first peak.

In Conclusion. The Zig Zag Indicator is effective to help you identify chart patterns, support and resistance areas and help you stay in the path of the main trend.

ZigZag

ZigZag per se is not an indicator, but it is a filter to show you where the trend has changed. In various spreadbetting strategies this is very useful in showing you where to find support and resistance areas or various classic patterns like a double bottom, triple bottom head and shoulders.

As a spread bet trader you define the ZigZag Indicator filtering out what percentage swing you are looking for between the previous high and the previous low. A 5% setting will draw a change of direction once prices have changed 5% for the recent peak or trough.

-Below is a spreadbetting example of the FTSE Index applying a 5% ZiZag Line

The lower you apply the settings to the ZigZag indicator the more sensitive it will be to a change in price from the previous high and low. This is subjective to how much noise you want to filter from the price movement.

Below is a trading example of the FTSE 100 with a 2% setting, thus making it more sensitive to price change.

You can apply this indicator on any Index, Forex currency, stock.

In the next article I will show you how to practically use the ZigZag indicator to filter out patterns or used also in the Elliot wave count.

Next: ZigZag – Practicle use.

MACD Convergence Divergence

Convergence and Divergence are very strong signals in the various spread trading strategies. Now we will see this applied to the MACD.

Lets recall:

Bearish Divergence is when prices of the Stock, index, Forex pair are making new highs but the technical indicator is telling you the opposite, it is showing weakness.

Bullish Divergence is when, instead, prices of the Stock, index, Forex pair are making new lows but the technical indicator is not confirming the new lows, instead it is making higher lows.

Below is an example of the FTSE INDEX:

In the above example we see the FTSE100 Index, this is a spread betting example of the MACD convergence & divergence spread betting strategy.

1) Bearish Divergence – Prices are making new highs. The second peak in the FTSE100 that follows is higher than the previous peak. Instead in the MACD crossover is showing weakness as it fails to confirm the highs by not following with a new peak.

1) Bearish Divergence – Prices are making new Lows. The second trough of the FTSE100 that follows in February is lower than the previous peak. Instead in the MACD crossover is showing strength as it fails to confirm the lows, instead it is making higher lows.

Previous: Spread Trading with the MACD Histogram