In your financial spread betting, you can use indicators to help discover profitable trading set ups. Any indicator in isolation will not tell you with any certainty what to trade and when. However, when used correctly and in conjunction with other analysis techniques, they can help to boost your profitably no end. This article examines a small selection of indicators including moving averages, stochastics and bollinger bands and show you how they can help your spread betting.
Moving Average
In its simplest form the moving average is just the mean value of a number of the last data points. Typically we use a moving average on the close values from each time period, so a 10 period moving average would plot the average value of the last ten closes.
The problem with the simple moving average is that it allocates the same value to older periods as it does to newer periods. Weighted and exponential moving averages, on the other hand, value more recent periods more highly. This makes them more responsive to changes in price.
Moving averages are best used to determine trend. An instrument can be said to be rallying if a short period moving average (e.g. 10 days) is above a longer period moving average (e.g. 50 days). If you are betting on trending markets, this logic can be used to confirm that your instrument is indeed trending. Note that this logic does not respond well to choppy markets as the short and long moving averages will cross each other in quick succession.
Stochastic
A stochastic is an oscillator that will show us where the last closing price is in relation to the instrument’s recent range. The stochastic is drawn in a plot of its own and features values from 0 to 100. When the value is under 20, price is at the low end of the trading range and is described as oversold. Price is at the high end over 80 and is described as oversold.
A stochastic is useful for highlighting areas where price may reverse in the short term. You could, for example, use a stochastic to bet on a stock that is trading in a range. As it moves up towards the top end of its range, price will be overbought. When the price starts to fall, the stochastic will drop beneath 80 and there may be a useful short trade. The converse is true for a long trade. A stochastic does not tell you if your instrument is trending or range bound.
Bollinger Bands
This indicator draws two bands around price that usually represent two standard deviations away from a moving average of price. They are a good indicator of where price is in relation to its moving average because the bands show the statistically expected outer range for expected price action. They are also a good indicator of volatility. The bands expand in volatile conditions and contract in narrow ranges.
You can use Bollinger bands to find when your instrument is overbought or oversold as it will be trading close to or at the bands. You might trade a trend following style and enter on pull-backs to the opposite Bollinger band to your trend. You can also find when your instrument’s volatility is low. If the bands contract to be very tight, an explosion in volatility is often just around the corner, so you could enter in the direction of that explosion when it occurs.
Conclusion
Technical analysis indicators cannot be used in isolation to reap limitless profits from the markets. You need to use them in conjunction with each other and other technical analysis techniques. They are however a useful tool in any spread betters arsenal.