Strategy and Technical

Strategy Ideas -Trading With The Trend

Trading with the trend is one of the most popular techniques used in spread betting and trading. Unfortunately financial instruments don't trend the whole time, in fact they trend for the minority of the time - the rest is made up of priods of choppy sideways movement.

There are various ways to identify trends and trendlines, moving averages and ADX are some of the most commonly used. When identifying a trend always look at the bigger timeframes first - for instance if you are trading on a daily basis check the weekly and monthly trends to confirm the trend. Using multiple timeframes in this way is highly recommended.

Once this trend has been identified then the trades should be made in that direction. However, most bettors will wait for the prices to move in the opposite direction to the main trend to get in at a slightly better price - this is trading on retracements. This tactic also avoids the trap of chasing the market.

Figure 1 - Burberry Weekly Chart

If we take the example of Burberry plc we have a share that has been in an uptrend for quite a long time and looking at the weekly chart we can see this clearly demonstrated. The red line denoting the 8 week moving average and the green 21 week moving average confirm the trend with both heading upwards with the shorter moving average above the longer one.

If we assume that we are betting on a daily basis then we would need to work out the entries and exits on a daily chart. See Figure 2.

Figure 2 - Burberry Daily Chart

One simple technique is to just use the moving averages and in Figure 2 we can see that the red 8 period moving average retraces and cuts below the lower green 21 period moving average. As it cuts back up from below at Point A this could be confirmation that the price trend upwards has continued and a signal to enter the bet at 845p. In reality because the moving average is a lagging indicator the entry would be above 845p.

A simple system for a stop loss here would be to use a trailing stop. An initial stop could be set at the last 5 day low of 820p - 25 point or so away from entry. As the bet develops move it in line with the green 21 period moving average level. So each day the stop loss would move up and preserve some of the profit. Trailing stops are excellent for trending markets but not particularly recommended for choppy sideways movements.

In a strong trend such as this it is recommended to ride it until a signal occurs that tells us to get out - so rather than having a set target to exit we look for a set signal to exit.

In this case a good signal would be when the 8 period moving average starts to turn lower at Point B. This would be at a price of around 1020 giving a sizeable gain on the trade of 175p. Note that if the exit was not taken the stop loss would execute at Point C. Other tools could be used to identify that this phase of the trend is over including the ADX.

Just because a bet has been exited does not mean that it can't be re-entered and Point D shows that another opportunity arises quite quickly.

The size of the bet per point would depend on the trading funds available. If there was an account of £2000 then the initial stop of 25 points at £1 per point would equate to 1.25% which would just about right. If the sensible stop limit was 50 or 60 points away then it might be wise to consider the merits of the bet with this account size.

Note: The strategies shown here are for information purposes. Any strategy should be adapted to a user's own profile. All strategies should be tested before being put into use. Strategies cannot be guaranteed to work in all circumstances. We can accept no responsibility for losses incurred.