Spread Betting Strategies: Using Chart Patterns to Forecast Price Movement
While many think that spread betting is merely a form of gambling and since the UK classes it as such this has fuelled the notion, there is much more involved than simply tossing a coin and hoping for the best. Well, there is if you want to make money. There are many spread betting strategies you can use to help you forecast the direction price will be moving in, however, we will look at only one of these, namely chart patterns.
Chart patterns are a popular form of technical analysis where traders attempt to identify certain patterns on a price chart. The patterns can signal either a breakout, a continuation of a trend or a trend reversal and are quite effective in providing buy and sell signals. There are hundreds of chart patterns in use; however, we will look at some of the most common.
Head and Shoulders
The head and shoulders chart pattern is not only one of the most popular and reliable patterns, it is also one of the easiest to identify. The pattern looks something like a head with two shoulders, or three price peaks and two valleys, with the second peak being higher than the other two. This type of pattern appears in an upward trend.
The inverse head and shoulders pattern is identical to its counterpart except that it is a mirror image and appears when the market is moving down.
This pattern is considered to indicate a trend reversal meaning that when it forms it is likely that price will move in the opposite direction to the direction it had been moving in until the pattern formed. Therefore, in the case of a head and shoulders in an upward trend, the market will likely reverse to a down trend.
The key to the head and shoulders pattern is the neckline, which is basically a support line for an upward trend or a resistance line for a downward trend. It is a horizontal line where the bottom of the price valleys touch and once price breaks through this support line, after the second shoulder is formed, the pattern is confirmed and the new trend begins.
Thus, if you see a head and shoulders pattern form in an upward trend, then you would place your sell order for your financial spread bet at a price below the neckline.
Cup and Handle
Another popular chart pattern is the cup and handle which looks just like a teacup and is considered to signal the continuation of an upward trend. This pattern is only useful if it forms in an uptrend and if there is a strong upward movement preceding it, then you shouldn’t expect much of a breakout as much of the buying took place before the pattern formed.
A good cup and handle formation will exhibit a semi-circular price movement that is anywhere between a third and two thirds the size of the upward price movement, with a handle that moves down. This downward movement of the handle signals a potential breakout and it is considered that any point above the handle is a good buy signal. Another buy signal, which is slightly more conservative, is any point above the peaks of the cup.
There are many more chart patterns that can help you identify trend reversals and continuations just as there are many other technical indicators that can increase your profit potential. However, most traders agree that chart patterns are invaluable components of spread betting strategies, no matter which ones are used, and they should never be overlooked.