Stocks, Strategies, and Common Sense

With the uncertainty in the markets, and the threat of double dip recession which may or may not be averted by governmental action, it can be difficult to know how to handle your stock portfolio. For instance, if the double dip happens stock prices will plummet to test the previous lows, from which they have now recovered a major percentage of the previous value. Can you bear to face such large losses again?

On the other hand, if the situation is handled well by the powers that be, and the major financial houses continue to support investment, you don’t particularly want to be out of the market while gains are continuing. In fact, viewed in this light some of the major companies on the stock market are severely undervalued, and at the current time there is a marvellous opportunity to “stock up” on first-class stocks.

What many investors and traders choose to do is listen to the financial news and cross their fingers. You can usually find a pundit who will concur with what your feelings are, and be reassured – to some extent – in your course of action, whether it is to get out of stocks, hold firm, or to increase your portfolio.

But in the end, what has changed? When was it that someone said you should forget all you know about trading, fundamental and technical analysis are of no value, and you’re on your own? Volatility comes and goes, but common sense dictates that markets are still moved by human actions and emotions, just as they have been for decades, including really good times and really bad times.

In whatever financial field you dabble, there are basic common sense practices which you should be maintaining. One is to set and keep to a stop loss position. In the short-term trading field this may be measured as two or three times the current volatility, or the previous high or low, depending whether you have a short or a long position. If you hold stocks for investment rather than trading, and intend to hang on to them for years, then your trailing stop loss position may be 15% or 25% away.

Many investors saw their stop losses trigger in the recent swing, and hopefully honoured it and got out of the market before losing too much. That is just what the stoploss is supposed to do. That is one of the reasons you have an investing or a trading strategy, to protect you from disasters. But other market participants may have felt that the rules have changed and dithered about applying what should be second nature, to their detriment.

Another way to deal with stocks going down is to hedge the move, using spread betting or other techniques. In this way you can remain fully invested, and still be protected from a large downswing. In effect, you have locked in your profits to date when you hedge, and also frozen them. You are insulated from the markets machinations, up or down, until such time as you take the hedge off.

Ok so onto the spread betting strategies.

Trend Following

One of the most common spread betting strategies utilised by investors (especially new traders) is undoubtedly Trend Direction, this is used primarily in determining entry positions and usually dubbed “trend following”. With this methoid the trader looks at the underlying momentum of the chart and before determining their trading plan. An uptrend is there the pricing activity shows higher highs and also higher lows, basically higher peaks and troughs. Without these tell-tale characteristics a clear uptrend is not in place and “buy” positions would not be placed. But if these higher peaks and troughs were seen many traders would view this market as “bullish” and buy the asset. The polar opposite of that is with downward trends, as you havce probably guessed downward trends are seen when prices show lower lows and lower highs. This is often seen as a “Bearish” market and traders generally tend to enter into sell positions based on the assumption that the trend is likely to continue than it is to reverse.

Trend following is typically done on longer time frames and is usually one of the more longer term spread betting strategies, that said it can be done on any time frame.

Reversal Trading

One other prevalent tactic is Reversal Trading (which can be also known as Contrarian Trading). With this strategy, traders are trying to find prospective places exactly where trends (either uptrends or downtrends) are over-extended and prepared to reverse. Basically, these traders appear for “buy” entries when a downtrend is observed reversing (and moving larger) and “sell” entries when an uptrend is nearing completion for the upside (prepared to turn lower). Quite a few new traders are reluctant to attempt this technique (rather favoring Trend Trading) but you will discover some clear benefits to Reversal Trading which are not present with other procedures. It is actually correct that reversals is usually a lot more complicated to determine than bigger trends, but reversals let for extra favorable entry points (obtaining low and promoting high) and this can be the opposite of what happens with Trend Following (exactly where traders are getting into positions considerably later, following the majority of the activity has currently occurred). Spotting reversals is usually a difficult Spread Betting approach, but with practice as well as the use of indicator tools, contrarian signals can result in far more favorable entry levels and considerably bigger earnings when productive.

Range Trading

Next we’ll look at Range Trading, which will invert the logic of trend following tactics. Right here, help and resistance levels are identified (preceding levels exactly where purchasers and sellers have entered in to the industry) and traders base position entries on the assumption that these levels are considerable in market place psychology and can continue to hold inside the future. These traders will set “buy” positions when rates are approaching help and “sell” entries when rates strategy resistance. Quite a few new traders use this approach for the reason that it will allow for uncomplicated cease loss placement. Cease losses are typically placed just outdoors of your trading range, as a break of those levels would signal that the range is no longer valid.

Breakout Trading

An alternative to these methods can be noticed with Breakout Trading, which is a variety of continuation approach exactly where costs are expected to extend larger (in an uptrend) or lower (in a downtrend). Normally, support and resistance levels are identified and traders wait for new highs and lows to become posted ahead of new positions are triggered. By way of example, when cost breaks above a clearly defined resistance level, traders will view this as evidence that an uptrend remains in spot and open “buy” positions based on the assumption that costs will continue greater. The reverse would be correct for prices which have broken beneath substantial levels of assistance. Potential issues with strategy come from the difficulty in placing stop losses as well as the reality that the method basically requires traders to “buy high and sell low,” which naturally just isn’t the most favorable area for entry. Lots of traders, nevertheless, prefer Breakout Spread Betting approaches because it makes it possible for for really clear entry levels, which typically correspond with increased volatility (and for that reason better earnings).

News Trading

The final Spread Betting approach that we will appear at is News Trading. This approach is various from the others we have described (which rely heavily on technical analysis) and demand an understanding of macro economic information and an precise interpretation of news headlines. This interpretation can occasionally be difficult (as there are many instances where industry opinion is divided on a problem) but offered that cost activity is typically dictated by an financial data release or positive/negative news headlines, this type of trading can prove to become extremely lucrative and easy to forecast. Examples of news events can be noticed when corporations release a quarterly earnings report, nations release government data (for example GDP or inflation figures), or when a geopolitical occasion is observed having an influence on marketplace activity. Traders ought to recall, nonetheless, to study the impact of macro economic indicators as this can be the only solution to forecast the marketplace response to various kinds of news stories.

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