Basic strategies Archives - Page 3 of 3

Momentum Indicator

Momentum Indicator

The Momentum indicator is a very simple and straight forward indicator. It tells you essentially what has been the recent change between the price of your current spread bet and the previous price of n days ago. What this relationship tells you is if your current price is stronger or weaker than the previous price. It is very similar to the ROC (Rate of Change).

It is constructed in a very simple way. It is the current price, lets say of the FTSE , minus the price of the FTSE 20 Bars ago.

Current Price – the Price N days ago.

Therefore if the price is below the momentum indicator, we are seeing weakness of the FTSE vs. it’s price N days ago.

If instead the price is above the momentum indicator, we are seeing strength.

An example of the momentum indicator:

page:

Next Page:Trading with the momentum Indicator

Trading the Commodity Channel Index (CCI)

Reversal Strategy

Many use the CCI as an oscillator, as it comprises of 75% of the prices within -100 and +100:

Spread bet Sell signal: when the channel crosses above the +100 and then falls back below the +100 line.

Spread bet Buy signal: when the channel crosses above the +100 and then falls back below the +100 line.

Trend Following Strategy

The CCI Channels can also indicate when a trend is starting:

Uptrend: When the CCI is above +100 and stays there this indicates a trend is underway. Often this is used with other indicators as a confirming tool. You can use a 3 EMA with the CCI Channels. As you can see from the example above.

Downtrend: When the CCI is above +100 and stays there this indicates a trend is underway. Often this is used with other indicators as a confirming tool. You can use a 3 EMA with the CCI Channels.

Previous Page:The Commodity Channel Index (CCI)

Average Directional Index (ADX)2

Trading Signals:

+DI Cross –DI

The +DI compares the two consecutive highs and the –DI compares the two consecutive lows.

Wells Wilder states:

-when the ADX >20 and the + DI is above the –DI. Trade/spread bet Long:

-when the ADX >20 and the -DI is above the +DI. Trade/spread bet short:

example:

Combining the ADX with other Indicators:

Ranging Market: Oscillators

Oscillators: When the ADX < 20, this tells us the market is ranging. In a Ranging market the most effective Indicators to use are Oscillators. When markets start trending again these are no more effective. Common oscillators: Bollinger Bands, Moving Average envelopes, RSI, Slow or Fast Stochastic.

Trending Market: Moving averages

When the ADX >20, the market is trending. In a Trending market the most effective Indicators to use are Averages. These keep you in a trend for the long run. An effective strategy that an be used to spread bet the EURUSD is the 3 EMA cross and ADX

Previous Page:The Average Directional Index (ADX) trading signal

Average Directional Index (ADX)

Volume Indicator: Average Directional Index (ADX)

The Average Directional Index measures if a stock is trending or not. It also measures the strength of the trend no matter it’s direction, and it is made up of other two parts, the +DI (Plus Directional Index) and the –DI (Plus Directional Index), which can generate a buy or sell signal.

The ADX, often combined with other indicators, Mainly tells you if what you are trading is ranging or trending. This will help you decide if using a ranging or trending strategy.

Well Wilder stated that the ADX above 25 shows a trending market and below 20 it is a ranging market. But often the 20 value is the dividing point between trending and not trending. As you can see above in the Dax Rolling bet, it was trading in a 400 point range for four months up until August. At the beginning of August, the DAX broke out of a range and traded lower almost 2000 points. At this point the ADX started moving above the 20 line.

Interpreting the ADX:

-The ADX above 20: the trend is starting.

-The ADX moving higher from 20 to 40: a trend is under way.

-The ADX above 40: the trend is very strong.

-The ADX moving lower from 40 to 20: a trend is under way.

-The ADX below 20 the markets are ranging.

Lagging Indicator: As you see above the ADX showed the start of the trend a bit. It is a lagging indicator. In fact often The Average Directional Index is complementary to another indicator.

Next Page:The Average Directional Index (ADX) trading signal

On Balance Volume

Volume Indicator: On Balance Volume

On Balance Volume is a tool that quantifies the strength of a price movement or trend. It helps you identify if it is weak or strong.

It is very easy to calculate:

If today’s price closes above yesterday’s price, then we give the volume a positive number. If instead today’s close is below yesterday’s close, we assign the volume a negative number. The close can be one also just one pence. The only thing that is important is the direction of the price, if it is up or down.

The volume is then added up, and an index is created.

For those spread betters that are mathematically minded.

Calculations:

OBV = ( (C-P) / |C-P| * V

Interpreting the On Balance Volume:

As Most Volume indicators, On Balance Volume can be used as a warning tool or confirmation tool.

Confirming tool

As you can see in the FTSE Daily Bet, The on balance volume is initially confirming your trade. The on balance volume is making new highs as the prices are making new highs. The On Balance Volume is confirming a strong uptrend in the FTSE 100.

There is a strong commitment from buyers.

Divergence: A warning tool

Instead in the other part of the FTSE Daily Bet, The on balance volume is showing weakeness as it is making lower lows while the FTSE makes higher lows. After the second peak you can see prices turn around and move lower.

The On Balance Volume has warned those spread better of a possible short, price reversal in the FTSE.

Charts** Not all spread betting platforms provide volume, thus you might not have the On Balance Volume. You will get this on private charting packets.

In conclusion, the On Balance Volume can be used as both a warning tool and a confirming tool.

It is important to add a volume indicator in your price analysis, other volume indicators you can use are the Accumulation Distribution, MFI (Money Flow Index), Chaikin Oscillator and the Price volume trend indicator.

Volume Indicator: Accumulation Distribution

Volume Indicator: Accumulation Distribution

Accumulation Distribution is a volume based indictor that is used as a price confirming tool or a warning tool that anticipates price change.

The Accumulation Distribution is a variation of the On Balance Volume. The main difference in the Accumulation Distribution is that the volume is weighted relative to the closing price.

You will not find this indicator on many spread betting platforms as they do not report volume, but if you subscribe to any charting software they will contain volume information.

Accumulation Day: the volume is added when the price closes higher than the previous day’s close. The amount of volume added to the indicator is multiplied by the relationship of the closing price relative to the daily range.

Distribution Day: the volume is subtracted when the price closes lower than the previous day’s close. The amount of volume subtracted from the indicator is multiplied by the relationship of the closing price relative to the daily range.

In Summary, when the day is in accumulation the volume is added to the previous day’s Accumulation Distribution line, and vice versa when the day is a distribution day;

Accumulation Distribution: Price confirming tool

When volume increases or decreases with the prices this proves to be an effective price confirming tool. You can read up more on volume in the volume section.

In the Diagram below you can see how the accumulation distribution indicator confirms a rise in prices:

Accumulation Distribution: A warning tool

On the other hand a few weeks later in the same British Land, a spread better with access to volume information could have foreseen a turn around in prices. In fact:

Look at the example above.

In British land we are making new highs, but this is not confirmed by the volume indicator the Accumulation distribution indicator which is instead making lower highs.

This is usually a sign of weakeness.

In conclusion Accumulation Distribution can be used as both a warning tool and a confirming tool.

It is important to add a volume indicator in your price analysis, other volume indicator you can use are the OBV (On Balance Volume), MFI (Money Flow Index), Chaikin Oscillator and the Price volume trend indicator.

Money Flow Index2

Trading with the Money Flow Index:

The Money flow index used as a warning signal tool:

The MFI is a good indicator of divergence and convergence as it has volume incorporated in it’s calculations. As volume is said to precede prices, it is a good indicator of when prices are turning.

Bearish divergence is when prices are rising but volume is declining, that is: volume is less that other up days.

Bullish divergence is when prices are falling but volume is increasing, that is: volume is greater than in other down days.

Bullish Divergence:

As you can see from the Cadbury Schweppes graph (CBRY.L), prices were making new lows, instead the money flow index was making new highs on the strong volume.

This would have been a good opportunity to spread bet a long position as soon as the bullish engulfing pattern was completed confirming the bullish divergence.

Bearish Divergence:

Instead in British Land (BLND.L) we can see the opposite pattern occurring. Prices are making new highs but this is not confirmed by the money flow index that is making lower highs. As you can also see this is replicated in the volume, lower highs.

This alerted spread betters to get ready to short the market. In fact as you can see the sign of weakness is confirmed by the Harami pattern that form after the new highs.

As you can see above the Money Flow Index is an effective price confirmation tool and price reversal warning tool.

Previous Page:The Money flow index used as a warning signal tool

Money Flow Index

Indicator: Money Flow Index

Family: Oscillator

Money Flow index is a momentum oscillator based of the change of price and volume. This is based on a similar concept to the Accumulation and Distribution, normalized between 1 – 100 , to create an oscillator similar to the RSI and interpreted in the same way. As an oscillator closely linked to volume it is best used to identify reversals and price extremes.

Calculations:

Typical Price: (High + Low + Close) / 3
Money Flow: Typical Price x Volume
Positive Money Flow: The Money Flow on days where the Typical Price is greater than the previous day’s Typical Price.
Negative Money Flow: The Money Flow on days where the Typical Price is less than the previous day’s Typical Price.
Money Ratio: Positive Money Flow / Negative Money Flow
Money Flow Index: 100 – [100 / (1 + Money Ratio)]

Example of the Money Flow Index:

Trading with the Money Flow Index:

Not many spread betting platform charts offer the Money flow index, but if you are using a private charting package that has volume indicated. You can spread bet referring to these charts

The Money flow index used as a confirmation tool:

MFI < 20 – oversold
MFI > 80 – overbought

As an Oscillator bound between 0-100, a reading between 0 – 20 indicates that the indicator is oversold and a reading between 80 – 100 means the indicator is overbought.

When the indicator finds itself in the oversold region, traders should look to start covering their shorts.

When the indicator is in the overbought region, traders should start covering their long positions.

Next Page:The Money flow index used as a warning signal tool