Basic strategies Archives - Page 2 of 3

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

Spread Trading with the MACD Histogram

The MACD Histogram is very good strength indicator / momentum indicator. The Histogram is constructed by the difference between the Fast MACD line (green Line) and the slower MACD Signal Line (blue Line).

The moment the faster MACD Line moves faster that the the MACD Signal Line, this creates a bigger gap between the two and the Histogram increases as it measures the difference between the tow. Therefore if a stock is having short term strength relative to it’s previous trend the histogram will in increase. If the trend in the short term has changed and the gap narrows the histogram will decrease.

A spread betting strategy is to trade this change of direction or strength, is to:

Spread bet Long:

When the histogram has been in a downtrend and now starts flattening and changing direction to the upside.

Spread bet Short:

when the histogram has been in an uptrend and now starts flattening and changing direction to the downside.

what you are doing is that you are capturing the momentum trade.

Next: Spread Betting the MACD Convergence Divergence

Previous: Spread Trading the MACD Moving Average

Spread Trading the MACD – Moving Average crossover

The way spread betters trade or interpret the moving average crossover is they wait for the signal line to cross over the MACD line, simply explained, the 9 EMA (which is the Fast line) cross the 26 EMA(the slower of the two lines). Below is an example of the FTSE 100 Index using the MACD Moving Average Crossover:

The MACD line is created by a 12 EMA moving average and a 26 EMA moving average.

A example of a spread betting strategy is:

Long:

when the MACD Signal Line (9 EMA – green Line) crosses the 26 EMA to the upside.

Short:

when the MACD Signal Line (9 EMA- Blue Line) crosses the 26 EMA to the downside.

The MACD can be used in another two was. That is using the MACD Histogram and using the MACD to spread trade Convergence and Divergence.

Next Page: Spread Trading with the MACD Histogram

MACD-Moving Average Convergence-Divergence

The MACD developed by George Appel, is a very popular indicator. Personally one of my favourites. Below I will discuss three main spreadbetting strategies with the MACD. How it is calculated in three steps:

MACD: Calculate the spread between a 26-Day EMA (Exponential Moving Average) – 12 EMA. This differential represents price velocity
MACD Signal Line: 9 Day EMA of the MACD Line.
MACD Histogram: The MACD minus the MACD Signal Line

The MACD is a very effective and popular tool. There are three main strategies used to spreadbet with the MACD.

MACD – Moving Average crossover
MACD – Divergences
MACH – Histogram

Next Page:Spread Trading the MACD – Moving Average Convergence Divergence

SpreadTrading the Momentum Indicator

Trading with the momentum Indicator:

Trend Following

Some like trading with the strength in the Spreadbetting markets and take a long or short position once the Momentum indicator crosses the 50 line. The momentum indicator can be used in both scalping and swing trading. In scalping it would indicate in which direction to spread trade.

Long trade: when the momentum indicator crosses the an absolute value, (often the 50) line to the upside

Short trade: when the momentum line crosses to the downside.

Closing your trade. The momentum indicator is not a good indicator to use to close our trade, because by the time it crosses the 50 line again, most of our profits have been eaten away. You should apply always your money management rules, and look for the when the moment indicator is turning, this would be

Divergence Trading

The momentum indicator is a strong divergence indicator, as prices diminish on their uptrend or down trend velocity the momentum indicator will start turning, thus forming divergence. This is an important concept in technical analysis, the velocity of the price movement is a leading indicator in a change of trend.

Bullish Divergence can indicate the end of a down trend.

Previous Page:The Momentum Indicator