Spread Betting Strategies: Trends and Support and Resistance Levels
Spread betting strategies are much like those in any other type of financial trading, meaning that the same concepts apply. Since technical analysis relies on statistics and historical data rather than fundamentals, the principles are the same for any financial instrument or trading style.
This means that you will be have to build your spread betting strategies much like any other trading plan, combining a number of different indicators to help you identify both entry and exit points. You will find that trends as well as support and resistance levels and your ability to identify them are critical to trading successfully.
The trend is one of the most important concepts that you will have to grasp in technical analysis and without it you will not be able to identify support and resistance levels accurately. In spread betting the trend means much the same as its general definition, namely the general direction price is moving at a certain time.
However, you have to remember that price never moves linearly and an upward trend can be made up of a number of peaks and troughs, where the peaks get progressively higher and the troughs or price lows are also progressively higher. Therefore, in technical analysis an upward trend is defined as being a series of higher highs and higher lows, rather than a straightforward upward movement.
There are basically three types of trends, the obvious uptrends and downtrends and horizontal trends. The latter are trends where the price doesn’t make a clear upward or downward movement and trades sideways in a channel.
A trendline, a common charting technique, is simply a line added to a chart that follows the overall direction of the trend. Since trends can be short, medium or long term, the lines will vary according to the timeframe you are trading. Trendlines for upward trends are plotted along the bottom of the higher lows and vice versa for downtrends. These constitute the support and resistance levels.
Support and Resistance
As previously explained, support and resistance levels are the higher lows in an uptrend or the lower highs in a downtrend. They are price levels that price cannot break through and is forced to retrace in the opposite direction.
Support and resistance levels are areas which traders are willing to buy or sell, respectively, the financial instrument they are trading. As such, these levels are basically self-fulfilling prophecies because everyone expects the price not to drop below a certain support level and they will begin to buy this driving the price back up.
Support and resistance levels are important in identifying trend reversal as well as breakouts. They can be used to determine entry points as well as exit points. For example, if a trader has a short position open and the price is moving towards a strong support level that price has tested frequently but has not managed to break through, then he will likely close his position, knowing that the market will probably reverse.
Likewise, if price breaks through a resistance level, it is likely that the market will continue to move up. However, support and resistance levels are not enough to confirm a breakout which is why you should always use other indicators, such as Stochastics or moving averages, as well.
You will find that trends and support and resistance levels will always be an important part of a financial spread bet, no matter how advanced you become in your technical analysis. In fact, some of the most successful traders swear by them, but you should never make the mistake of using them on their own because the market has a habit of being completely unpredictable.