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Financial Spread Betting

So what exactly is it about financial spread betting which makes it such an attractive proposition for anyone who wishes to speculate on the financial markets?

For many, it is the opportunity to make good profits without the need to invest vast amounts of capital; for others it could be the fact that making a trade takes no more than a couple of clicks of the mouse, all from the comfort of your home or office. It should also be mentioned that due to the latest mobile technology, making a trade whilst on the move is something that can easily be done which in effect means that that old adage of making money whilst sitting by a swimming pool, somewhere hot and sunny, is now a distinct possibility.

Easy To Get Started

It used to be the case that getting involved in financial spread betting was not an easy task, the brokers that offered a spread betting platform to trade on were more interested in the 'city boys' and a phone call to enquire about opening an account was often met with a gruff response which was not exactly welcoming. Spread bets could only be made by telephone and if you were not used to the manner in which the traders went about their business, it could be quite intimidating.

Now though, things really couldn't be more different, the spread betting firms are constantly on the look out for new clients and welcome them with open arms, for anyone who is not familiar with financial spread betting, the education programmes that the various brokers have in place are second to none in terms of quality and the client support that is in place is both knowledgeable and helpful in every possible way.

The competition between the brokers is immense which is obviously excellent news for both existing and new clients, the boundaries are constantly being pushed due to the advancements in the trading technology, training and education. as well as the charting facilities which are usually provided without charge for existing clients.

The Best Course Of Action

The best course of action obviously depends on the level of experience, but assuming an individual is new to this form of trading, it would be advisable to open an account at one of the brokers who have a comprehensive education programme in place, and who also allow a period of time where financial spread bets can be made with a small stake size.

For someone who perhaps has a little more experience, the method and the markets that they trade on should be looked into. For example, if someone specialises in trading the daily dow then a search for the broker with the tightest spread on that particular market should be a priority. If trading on the move is the preferred method, then it will become apparent that that some brokers have superior mobile trading platforms than others.

Whatever the requirements, there will be a financial spread betting firm which fits the bill and it would not be an exaggeration to say that there has never been a better time to get involved in this exciting form of speculating on the financial markets.

Trading with an EA

A lot has been said about expert advisors. Some see it as the best thing that has ever happened to them, while others have seen it as the worst mistake of their trading lives.

I know a fellow who introduced the concept of trading binary options with expert advisors into an African country and made $50,000 in a single seminar. The attendees were so many that he had to change his venue on the spot. With the proceeds of his seminar, he started an alternative energy company which is thriving. However, the same could not be said about the attendees to his seminar as many of them had mixed results when they used the EAs sold in that seminar.

That event led me to do some research on EAs, and sometime later, I discovered that many of the EAs sold on the internet are unbelievable scams. It was not until I read an article by Steve Fleming that I discovered that it is possible to take a strategy and code it into an expert advisor. Armed with this information, I set about taking some of the strategies I had been taught and encoding them into EAs at a cost of $150 each. That decision has transformed my trading career as you will see in these snapshots:

What is the lesson here? You do not need to spend thousands of dollars buying untested and unproven EAs. All you need to do is to get a very good trading strategy, and get an MQL programmer (if you are using MT4) to convert this strategy into an expert advisor for you. If you are using Ninjatrader, Amibroker or TradeStation, you can also get a programmer to use the appropriate coding language to convert the strategy into a piece of code that will churn out trades that you can be sure of. 

If you visit online forex trading forums, you will come across many strategies and many programmers. Use the one that fits your trading style and risk profile. Not all strategies may be suitable. Some may have considerable drawdowns which your trading account cannot handle.

The good thing is that you have a choice if you use a strategy to prepare your own customized robot. You are not buying blind, which is what happens when you purchase a commercial and untested forex robot. So make that choice to automate the strategy that works for you, so you can replicate the kind of trading results that you see above.

Profiting from Channels

What are channels? In the financial markets, channels are two parallel trend lines formed by connecting the highs and lows of the price action of an underlying asset. Three things must occur for us to properly identify a channel and make a trade through our Forex account.

  1. There must be two trendlines (an upper trend line and a lower trend line).
  2. The trendlines must cut across at least 2 or 3 highs (upper trend lines) or 2 or 3 lows (lower trend lines.
  3. The upper and lower trend line must be parallel to each other.

Channels can be plotted using the channel tool on the MT4 platform, or by independently drawing the upper and lower trend lines, and then visually assessing the trend lines to make sure they are parallel to each other.

There are three types of channels:

  1. Horizontal channels
  2. Ascending channels
  3. Descending channels.

Horizontal Channels

Horizontal channels are very easy to identify on the charts because a trader can plot them using pivot points. You can also use the channel tool on MT4 to plot the channel.

In the chart above, the range of the movement between the trend lines of the channel is about 600 pips.

Ascending Channels

Ascending channels point upwards because they occur in an uptrend, and we see that even though the prices are progressively rising, the range of price movement of the candlesticks are still limited by the channels so formed.

The chart above is a 4 hr chart for the AUDUSD. On this chart, we can see the several points at which a trader can place his buy and sell trades. Over a 3-week period, 6 buy and 3 clear cut sell signals appeared. Even without employing complex technical analysis, a trader can use this ascending channel to generate several trade signals and make good money.

Descending Channels

Descending channels occur in a downtrend and point downwards. Again we see that the range of movement of the candlesticks is limited by the descending channels, even though prices are progressively falling.

In this chart, we can see that there are 3 buy signals and 2 sell signals. Being a daily chart, the pip range is quite large and even if a trader is able to trade 2 signals, this would lead to huge profits.

We need to emphasize here that it is not usually a good idea to place buy and sell signals using the channels alone. The buy and sell signals must be reinforced by the use of indicators like the Fibonacci retracement tool and the Stochastics oscillator that indicated overbought and oversold market conditions. 

Furthermore, my bias for these types of trades is to trade with the trend, in keeping with the saying that the trend is my friend until it ends. So I would typically take the sell signals in a descending channel, and a buy signal when it appears on an ascending channel. When trading the horizontal channels, you can trade both buy and sell signals since the trend at that point in time is indeterminate.

A Rough(er) Patch Will Soon Develop

I haven’t written much for this blog lately (at all?), but I have been monitoring the market. Right now, I’m very bearish and am expecting a bear market to develop sometime within a year…perhaps as soon as next week. After the recent runup last week, sentiment has greatly improved (example: http://apps.thestreet.com/survey/results/rmBullsBearsBarometerPollResults.jsp?sid=40557&mode=pollresults). These types of results are very similar to what were seen in September 2008, and I expect a similar result to happen.

We’re about to hit many deflationary headwinds that simply are not discounted by the market in my opinion:

1. Tax increases. About $100 billion will be soaked out of the private economy to pay down the government deficit. Most of this is due to the expiration of the Bush tax cuts for those making $200k/$250k+. Not only do tax increases have the effect of taking money out of people’s hands, they discourage people from expanding and developing their businesses. Since their after-tax return is now lower, they will be less likely to take risks. Furthermore, due to the crash in small business lending, many small businesses are expanding from after-tax profits, not bank loans, and there will now be less of those to use thanks to the government.

These reasons explain why some economists apply a multiplier of 3 to tax rate cuts/increases. So $100 billion taken in taxes will have a $300 billion negative effect on GDP. This estimate was made by Christina Romer, who works for the White House no less. At $300 billion, that’s 2% of GDP…so we can expect a 2% drop in GDP from tax increases alone! Given we’re struggling to have much better than 2% GDP growth right now, tax increases alone might throw us back into recession.

I don’t think the tax increases will be fully discounted by the market until they happen. This was the case with the Reagen tax decreases (the reverse). Read Laffer’s article about this more in detail (note how the economy rocketed by over 7% for a full year during the Reagen stimulus, and we’re struggling for 3% during our peak in stimulus). This makes me believe we won’t see the worst of things until around March of 2011, as the deflationary effects of the tax increases become fully realized.

2. Europe is messed up, simply put. The recent stress tests were a joke. No one knows what is on their banks’ books, since the transparency levels there are much lower than here. One must ask…why were the stress tests not so stressful? The answer: we can’t handle the truth. Even under their ‘stressful’ conditions, Greece is still able to make debt payments and the stock market doesn’t fall by more than 20%. Doesn’t sound that stressful to me!

3. China isn’t so magnificent. China’s stock market is down 20% for the year. For those that remember, China’s stock market turned up much sooner than the US did (their bear market ended Nov 2008, ours did March 2009). This is why many view China as a leading indicator. Oh, has anyone checked out their property bubble lately either? It makes California look tame.

4. We’re at peak debt. Total government, personal, and business debt is estimated to still be about 390% of GDP, which is still an all-time high. While the consumer and businesses are deleveraging, the government is running insane deficits. So we’re simply trading in personal and business debt for unproductive government debt.

5. We’re at a general level of peace right now. If Israel/Iran blows up or North Korea goes crazy, look out below. The world is struggling in a time of relative peace, and that is a very very bad sign.

6. Have you checked out the ECRI weekly leading indicators lately? Eeeeek! The last time there was a drop of the magnitude seen lately was in the late summer of 2008…and we saw what happened soon after.