Trading Day

Well, we're sitting pretty much where we were this time yesterday. The score is 3-3 in terms of hitting the upper and lower moving averages this week. And so we enter the extra-time known as Friday (or the 4th quarter if you think football is played with the hands). But I don't expect the killer trade till the second half, with three pieces of data coming out of the US between 13:30 and 15:00. Rather late in the day for the FTSE but still enough time for a dramatic finale. The worst case would be a stalemate at the whistle, with the out-of-hours FTSE waiting for the Dow penalty shoot-out.

The only really important levels are

Resistances

6129 (30DMA)
6099 (200DMA)

Supports

6047 (90DMA)
6000

beyond these you can take a guess.
The struggle is for the 200DMA level, with the other two MAs squeezing the FTSE into making a decision either way.

Run Profits and Cut Losses

Well, how many times have we heard that one? This must be the number one piece of useless advice trotted out repeatedly on trading websites, newsletters and courses. What does it really mean? The trading world is so full of quantitative data - stock prices, indices, moving averages, indicators - that the above advice seems not only such a platitude, but is also rarely backed up with any hard and fast rules.

The opposite of this rule, "Cut Profits and Run Losses" is obviously insane (and yet how many of us have been guilty of doing just that?) The delusional hope that the market will turn in your favour. The look of horror as your profit dwindles to nothing. Praying to your indicators will not appease the market demons. To our knowledge, Dante was no day trader, but his admonishment to "abandon all hope" as he stepped into the darkness should be plastered above the entrance of every stock market. Not much of a unique selling proposition, but nevertheless true. Dante was lucky in having a guided tour, but you're on your own.

As I write this I am increasingly aware that this could get very long, so will break it down into digestible pieces. I first want to look at the idea of running your profits. As I said, all rather obvious, but what does it mean? You sit there, your trade is, say, 50 pts in profit. Your exit indicators (whatever they might be) are nowhere in sight, but the market starts to move against you. You see your profit shrink to 40... to 35... to 30 pts. Your exit indicator tells you to stay calm; the trend is not broken. Your profit keeps dwindling, now standing at 20 pts. Is this noise or a signal? Take your diminished profit or wait for the trend to return in your favour? After all, you were right, weren't you? But were you 50 pts correct, or just 20 pts? We've all been here, and this is exactly where many will "cut their profit". You really don't want to see a winning trade go into the red so take a deep breath and take the 20 pts on the table. Damn! It's just 10 pts now! Take it! Now!

So what does the wise trader do in such a situation? Some courses suggest that before opening a trade you write down not only your stop loss but your exit point. But doesn't that go against the advice of running your profits? Well, yes, however, I'd suggest writing down the exit point just to remind yourself of your original expectation. You may have an overly optimistic expectation but trading should have beaten that out of you by now. The crucial point here is, I think, what instrument you used to initiate the trade. What was the timeframe of the chart you used? This is what I tend to do. Let's look at some numbers.

A 3-minute FTSE chart (using my combined SAR and MACD indicators) will give about 20 signals during a day. Some of these will be mixed signals and I personally would not trade, but that's another article. The average trend on a 3-min chart is about 20 pts. A 30-min chart will give 2 or 3 signals during a day with an average trend of some 50 pts. Already you can see that your expectation - your tentative exit point - should be (indeed must be) different depending on which signal on which chart you were using to trade. To wait for a 50 pt profit on a 3-min signal will doom you to lose most trades. So what should we have done in the above fictional trade?

Firstly, at +50 pts, we would have already moved our stop. Using a 3-min chart, remember that the average trend, and hence average profit is just 20 pts. I would have moved the stop down to +30 pts by this stage, already locking in a more than healthy profit. If the 50 pt trend was very quick the exit indicators on the 3-min chart will lag a bit but will probably be somewhere about the +10 to +20 mark. If the trend was slow those same indicators should be fairly close to +40. On a 3-min chart the strategy seems crystal clear. You have already run your profits as they are well above the average. You have already followed the golden rule. The chances of there being more profit using the same 3-min chart is very very small. Take the +40 pts and pat yourself on the back - save the sweat for another time.

But what if we had used the 30-min chart for the same trade. As I said, depending on how the day goes there may be just one signal, or possibly 2 or 3 - very rare that there are more than 5 signals. Your average expectation is about 50 pts. You've hit that but have in the back of your mind this running your profits rule. You're sure that if you take it now it will go another 50 pts in your favour and you'll regret it. At this point I would have moved my stop to either +10 or even +20. You won't lose anything. So now we watch the market reverse and see our profits dwindle. I think this situation is less clear. I personally like to switch between timeframes as they give different views as to what's going on. Indeed in this 30-min example I will usually flip to the 3-min chart just to micro-manage the trade. The 30-min chart is good to show the trend for a session (or half a session) but is too coarse to find a really good entry (or exit) point. In our example, we will reach the point where the 30-min chart is still showing an unbroken trend, but the 3-min chart has already signalled an exit. What to do?

There is, in my mind, one crucial question behind these judgments that we have not as yet explicitly stated. How can we tell a valid signal from background noise? We use all kinds of analytical tools to somehow smooth out the noise but only with hindsight can we tell which reversals were genuine signals and which were the noise of a complex system. However, we can use statistical methods to give us an edge. In the above examples, such statistical data will save us a great deal of sweat. Although, like anything, it will not be 100% right, it will provide a benchmark for us to distinguish a signal from noise.

So let me introduce two quantites that we have actually already been discussing but haven't as yet defined: our Expectation; and our Signal Strength. We have already met our Expectation values - for the 3-min chart it is 20 points and for the 30-min chart it is 50 points. These are our average maximum profits using the open signals from the given charts but closing at hghest possible profit before the close signal. These values will be different for different chart timescales and for different indicators. You will have to calculate your own. The Signal Strength I calculate as the difference between your average profits (I hope they are profits, otherwise change indicators) and your Expectation value. This gives us a statistical number that defines how much a market pulls back from potentially maximum profits before it hits your close indicator. I find this helpful in precisely the above scenario, where the close indicator is still a long way from being triggered but the market moves quickly. For the 3-min chart the SS=10 points and for the 30-min chart SS=25 points. I am not sure if it is significant that these are half the expectation, but perhaps you can save yourself a lot of calculations and take half the expectation as the signal strength.

So what use are these new numbers? To me, they give me an indication as to when any market reversal is a signal rather than noise. It also gives me a new exit point if my usual indicators have not yet been triggered. There is a case to possibly change exit indicators but that's for another time. The other option is to adjust the parameters of the indicators to be more effective as market volatility changes, and yet again this is another topic for discussion. What I have set myself in this article is what to do in the scenario where the market starts going against you, your profit is dwindling, and there is nothing in your trading armoury to tell you to bail out. Remember, we were trying to define what "run your profits" actually means, apart from being a platitude.

So what would we have done, using our new tools? In the 3-min example, we had reached a profit of 50 points. With a Signal Strength of 10 points, I would have closed at +40, which is exactly what we did. Using the 30-min chart the situation was less clear; we were sitting at our Expectation value so would have been a good trade but it was possible for the market to move in either direction. Even if the market retraced 20 points, on a 30-min chart this could still just be noise. With our new parameter of SS=25 we would set our exit point at 50-25=25 points. We would thus close the trade at +25 points profit. It is unusual for a 3-min trade to yield a higher profit than a 30-min trade, but the latter signal is much slower to respond to rapid changes, hence the need for a profit-taking signal. The SS value can also be used to set your initial stop loss, indeed you can remove yourself from the close altogether by setting a trailing stop at these values. Sometimes the market will then resume in your favour and you will have stopped-out with only a modest profit. As always, hindsight is really of no use whatsoever in deciding what to do in the here and now. With just fairly modest statistics we now have a handle of how large a movement can be counted as a real signal rather than random noise. If your closing indicator is already ahead of your trailing stop then use your indicator - you have already run your profits. If your new trailing stop gets hit then it is done with the knowledge that the retracement was large enough to be considered a signal - yet again, I think you have done your best to run your profits - nobody is going to tell you the precise turning points.

Just some closing comments. I have developed these numbers myself and have no idea if they already have a name or if they are quoted elsewhere. I really can't be bothered to search this out as I find them useful and that's all that matters. If anybody cares to enlighten me on such links then feel free to leave a comment. I may refine these in the light of further data. For example, when I started analysing the data I thought the standard deviation of profits would prove useful, but then found that it was too large a number; mainly because there are a small number of very profitable trades that skew the distribution. Those of you who wish to do your own analysis, it is very simple. You just need to input three numbers for each trade: the opening value, the closing value and the best possible closing value (the mythical turning point that we can only see in the rear-view mirror). Then calculate your average profit/loss using just your signals and your maximum average profit/loss using your entry point and the best possible close. The more data you have, the more realistic your averages will be. Even if you don't use my ideas above, these really are the minimum requirements to test whether your indicators are useful or not. Once you have back-tested everything and you are happy with your profit expectations it is then time to forward-test your system in real time doing paper trades. If you're still feeling happy, then it's time to open your wallet.

Trading Day

Overnight move sees the FTSE poised to rise and sitting bang on 6100. Already at about +35 pts all the usual indicators have already been hit, so a matter of waiting to see a reasonable entry point, and to see if this holds.

TRADE
FTSE Daily
SELL @ 6103.3
using 1-min chart

Far Out Trades

24 mins to close.
oil going up. FTSE going down.

FTSE to close down > 30 points @ 4.3

Trading Day

In contrast to yesterday, this morning is very very early. The Dow recovered last night, so the expectation is of a similar move from the FTSE. The spread betting companies seem pretty good at estimating the opening levels (and pretty quick at adjusting their quotes) but I often feel that the actual cash market needs to feel the new index level on paper rather than just on the futures market. The FTSE is currently quoted about 25 points above yesterday's close. The price of crude oil dropped sharply yesterday to close below $129. The two largest companies in the FTSE are Shell and BP. The FTSE is calculated using a market cap weighting. It would not surprise me to see a dip before we see a rally.

Resistances and Supports as yesterday.

I may, or may not, be here at the open as need to go out. However, see previous Trading Days for strategies.

Trading Day

Kicking off the morning a little late as have been watching the market predictably rally at the open. Am always wary of the "relief rally" tag, so just take note that at 6144 sits the 30DMA.

Resistances
6300
6250
6200
6144 (30DMA)

Supports
6100 (200DMA)
6045 (90DMA)
6000
5800

Far Out Trades

This is very early in the morning but take your pick from one of these:

FTSE to close down > 30 pts @ 7.5
FTSE to close down > 50 pts @ 4.0

Long day...

Trading Day

Rather late in the day, but just to show that I haven't been asleep on the job, today is a public holiday in both the UK and US and is therefore a non-trading day.

Back to sleep now ...

Far Out Trades

This is on the cusp of craziness but here goes.

FTSEto finish Down > 50 pts
BUY @ 9.8

I just think those Friday night blues will set in before the close!

Trading Day

I write this very early today as need to go out. I will keep an eye on the market on my mobile, but probably will not be able to post comments till I come back.

Anyway, the Dow had a very similar day to the FTSE, arresting the slide... for now. Oil and gold have also come off their recent highs. The 1-hour chart just needs to drop to 6175 for a downward trend. The 30-min chart needs a break above 6185 for an upward trend. And as of writing the FTSE is at 6180 - so couldn't be more symmetrical. Given how close the indicators are to the market price just be careful of any opening froth.

Actually, given that the FTSE is sat there at par, and given it is a Friday before a 3-day weekend, I am going to take what was one of my favourite plays last summer and take essentially a "double option" using the 50pt ranges.

BUY FTSE to close up over 50 pts @ 14.8 pts
BUY FTSE to close down over 50 pts @ 18.4 pts
Total cost of 33.2 pts
If it just touches +/- 50 pts then one of the two contracts will be worth about 50. At that point take a close look not only at the market chart but also the contract chart to find the best exit point. It could go all the way to 100.

Resistances and supports as yesterday.

Have a good day!

Far Out Trades

FTSE to keep in range -80 to +80
SELL @ 95 pts
COST 5 pts

FTSE currently at -10 pts. Has an hour and a half to make a move!

Trading Day

Arrived late to the party today and missed a nice 40 pt rally as indicated on the 3-min chart. Overnight the plunging Dow dragged the FTSE to 6150 but has now recovered to be pretty much flat from last night's close. I am sometimes puzzled by the FTSE's slavishness at following the Dow. There are certain economic similarities between the two countries but the profiles of the indices look very different. However, one back-of-an-envelope statistic sticks in my mind; that half the UK's trade is with Europe, but half of UK foreign investments are in the USA. What appears as slavishness is thus merely a reflection of the changing value of a large chunk of UK multinationals' portfolio. However, we are currently seeing the Dow and FTSE diverge somewhat. This seems wholly due to the differing weighting of commodity stocks in the two indices. With oil at $135 and rising, and gold peering up at $1000 again, on their own these rises are good for the FTSE's petrochemical and mining sectors. With the dollar also losing ground to sterling the consumer cost of these price rises is more limited in the UK than the US. IG Index have a FTSE-Wall St Differential market, which as the name suggests is just the difference between the two indices. Yesterday saw a huge drop and it now sits at the very bottom of its recent range. A slight structural decoupling will see this drop further.



Resistances
6500
6400
6300
6250

Supports
6150 (30DMA)
6100 (200DMA)
6040 (90DMA)
6000

30DMA was hit out of hours and held. Both 1-hour and 30-mins chart showing positive trends for this session. Buy signals were at about 6175.

Far Out Trades

OK, I don't think the first one is going to come in, so here's another one for our addicts.

FTSE to finish down > 50 pts
BUY @ 4.5
If FTSE drops to 2140 this will rise to about 50 pts.

Far Out Trades

Now, I'm sure there are lots of punters out there who see spread betting as... well, betting! Those of you who like the long odds trades and the thrill of seeing a 5 point trade come in at 100. So, just for you, here's a series of Far Out Trades.

Now, I don't much like taking completely stupid bets, but there's no harm at looking at unlikely but possible events.

So here's the first one!

SELL FTSE to keep in range -100 to +100 @ 95.9
COST 4.1 pts

If FTSE touches this it will go to zero. I would probably take it at 50-60 depending on the trend.

Good luck!

Are Bungee Bets Worth a Plunge?

The spread betting company IG Index recently introduced a new instrument: Bungee Bets. Their own site describes them as a way of profiting from market moves without the annoyance of being stopped out. If the market goes against you the bet remains open (if temporarily worthless), so that if later it comes back in your favour you can be smug, claim you were correct all along, and take a profit. But... well... isn't that what options do already? So I investigated the relationship between the new Bungee Bets and the Daily Options on IG.

Bungee Bets are quoted with a Floor or Ceiling. A Floor is a level below which the bet will not fall, and a Ceiling is a level above which it will not rise. So essentially they work the same way as Call and Put Options respectively. If you think the market is going up you could either buy a Call Option or a Bungee Bet with a Floor. If you think the market is going down you would buy either a Put Option or a Bungee Bet with a Ceiling.
If you thought the market would rise and bought a Call Option at the money, if the market were to fall then your option would slowly decrease in value. If the market closed below your strike price then your option would close at zero. If you made the same play with a Bungee Bet rather than an option, what would happen? Well, if you bought a Bungee Bet with a Floor at the money, and the market went against you then you would slowly lose money. If the market were to close below your Floor then your bet would close at zero. So at the qualitative level, Bungee Bets and Daily Options seem to work in identical ways. But are they priced the same way?

If you look at a Bungee Bet at or around the current market price you will see that the 'market price' quoted for that bet is very different to the real underlying market. I took a snapshot yesterday when the FTSE was bang on 6300 to make the numbers nice and easy.

Let us assume you think the market will rise. You start by looking at the FTSE Bungee Bets with a Floor below which your bet cannot fall. The 6300 Floor is priced at 6318/6324. Immediately you can see that the Bungee 'market price' is already way above the underlying market price. If you were to buy this contract then your liability would be the Buy price minus the Floor, in this case 6324-6300=24 points. Also note that the spread is 6 points and the mid-price is 6321, or 21 points. Now what about the equivalent option?

Look at the FTSE Daily Options and find the 6300 Call. This was priced at 19/22, meaning that to Buy this option would cost you 22 points, with a mid-price of 20.5. Note that the option spread at this price is just 3 points compared to the Bungee's 6 point spread. Apart from these small differences, your liability - how much you actually deposit from your account - is almost the same. If anything, Bungees are slightly worse in terms of spread and hence the amount you need to make up just to get even.

Let me give you two other examples just to show that this is not accidental. Rather than taking a punt at the market price you want a slightly cheaper contract so look at prices slightly out of the money, say at 6320. Now, the 6320 Call is priced at 10/13, so to buy it will cost you 13 points. As it is out of the money the value of the option is 13+20=33. Yes, you are only paying 13 points, but in order to close even the market must rise 33 points just to cover your deposit. Now the Bungee with a 6320 Floor is priced at 6329/35, so to buy this contract will cost you 6335-6320=15 points. As the market is currently at 6300 the Bungee Bet (just like the option) needs to make up 35 points just for you to break even. Note that the two mid-prices are 11.5 and 12 - identical save for a bit of noise. So yet again, the Options and Bungee Bets have virtually the same prices, with Options actually being marginally cheaper because of their tighter spreads.

The same thing happens for in-the-money contracts; I don't need to go through the maths of it! Well OK, I promised I would! A 6280 Call is priced at 29/33 with a mid-price of 31. A 6280 Floor is priced at 6308/14 with a mid-price of 31. To buy the Call will cost you 33 points, and to buy the Floor will cost you 34 points. Both are 20 points out of the money. Same difference!

So what have we discovered? That Bungee Bets are nothing more than Options in disguise, being priced in terms of their underlying market rather than merely the difference between the market and the contract strike price. They are the same thing, except Bungees wear a suit and tie whereas Options walk around naked. If anything, Options are a few points cheaper. So, the question strikes me,"Why has IG Index bothered to introduce a 'new' contract that is nothing more than an existing contract?" You may wish to ask IG that question. I rarely use IG's options as I think they are usually poor value compared to their Binary Bets (but that's another article). The only thing I can think of is that their options contracts are under-used and probably also misunderstood, so they decided to remarket them as Bungees. Well, we've seen through that one!

RM

Trading Day

Well, yesterday was fun! The news services seem unanymous in blaming rising commodity prices and the fear of inflation for the falls across the globe. That doesn't quite explain why the FTSE took such a hammering, although as it already opened some 40 pts down it was partly playing catch-up with the Dow's previous session fall. Assuming, however, that the gentlefolk in the City are just self-serving money-mongers the small matter of a UK tax on offshore earnings may have tipped the bulls over the precipice.

Resistances
6500
6400
6300
6240

Supports
6150 (30DMA)
6099 (200 DMA)
6035 (90DMA)
6000
5800

Let's see what today brings - probably a relief rally but I'm sticking with my recent clouded view.

Enjoy the ride.

Trading Day

FTSE had a good day yesterday with a high of 6390 and closing at 6376 with a gain of nearly 2%. However, this morning we find it has been dragged down some 40 pts before opening, yet again by the Dow. Both the 1-hour and 30-mins charts already giving bearish signals. Will wait for the open as often the cash market retraces the changes in the futures ad then we will see.

Resistances
6500
6400

Supports
6300
6280
6260
6240
6230 Daily SAR
6200

The Clouded View: How Much Steam Left In The FTSE?

In January the FTSE fell to a low of 5315 - not seen for over 2 years - but closed just above 5500. In March it made a revisit to this level, with a low of 5415 and closing below 5500 for a couple of days. Since then we have seen a slow but relentless drive upwards, with only a slight pause to break through the 6000 level. So is there much further to go?

In terms of day-trading this is a fairly academic question. I just look at the numbers and the indicators and, hopefully, hold my nerve. But there are people who like to hold on to at least one long-term (or medium-term) position and this gives me a chance to look at the daily chart in some detail. I also don't much care for predictions. The present is turbulent, the future cloudy - none of which makes for a clear strategy. However, just as in the case of ignoring the news but being aware of when it happens, this is a case of being prepared for the next bout of high altitude turbulence.

So as of writing the FTSE sits at 6350 and getting ready to open in a couple of hours. The Dow is struggling to keep its head above 13000 for the second time in a couple of weeks, but for the FTSE this is the first attack on the 6500 level, not seen since January when it greeted the new year by tumbling 1000 points in 3 weeks. Now 6500 is the obvious major resistance level but there is a bit of hard work needed to get there. Around 6400 we find the October 2007 low as well as the August high. On the downside the FTSE has not broken below its 30-day moving average since it rose above it nearly 2 months ago. That sits at 6160, with the 200DMA at 6100. Before hitting either of those the SAR is at 6225. The MACD is looking very flat despite the rally as the FTSE has been checking every support level before moving on to the next.

So, if you want a prediction, go ask a remote viewer. My own view is that we will see increased turbulence, whether we hit 6500 or not. A break downwards hitting the SAR may see the 200DMA tested. Depending on when this happens that gap between the SAR and 200DMA could be about 200 points. Not a bad profit for such a clouded view.

RM

Custom Search Results

Trading Day

Last week the FTSE bounced around a narrow range of 6150-6250 until Friday, when it lurched upwards to 6350 and closed just above 6300. Wall St failed to respond in kind as oil and gold rallied. We thus need to see if 6300 will hold.

Resistances
6500
6350


Supports
6300
6280
6260
6240
6200



On the 1-hour chart the FTSE has touched the SAR on the upside, so is bullish. However, the MACD is still negative, and indeed in the first minutes the FTSE has dropped. The 30-mins chart still bearish. No trade for the moment.

Rising prices of crude oil and gold have a complex effect on the FTSE as it has important petrochemical and mining companies listed. It is also worth keeping an eye on currencies at the same time. Friday's commodities surge was quickly followed by a drop in the dollar, so that in Euro and Sterling terms the rise was limited.

I am always cautious of indicators on Monday mornings. On IG the charts run continuously and the obvious lack of action during the weekends means that the graphs have flattened and indicators can give false signals. This is not so big a problem during the rest of the week as the FTSE prices are adjusted for the Dow and then Asian markets whilst London is closed.

Sitting on my hands for the moment...

The Start

This blog is about spread trading (or spread betting). Spread trading platforms offer certain advantages for the small and medium trader over having an account with a broker to trade futures or options. The first is obviously size - you can open a modest account and trade small quantities without losing your shirt. This is crucial if you are just starting or are less than hyper-confident about what you're doing. The second advantage is that the spread betting industry has developed numerous contracts that just do not exist in the main futures markets. These generally have fallen under the name of binary bets and I'll discuss these in more detail elsewhere. These have meant that even professional brokers will sometimes have spread betting accounts on the side to make some extra money as binary bets can be very profitable.

In the UK, platforms such as IG Index and CMC are covered by both the Financial Services Act and the Gambling Commission. Currently any profits you make are free of either personal or capital tax. The FSA regulates the standard futures and options contracts, whereas the GC regulates the binary bets. Actually, the picture seems less than crystal clear as the FSA website gives a football binary bet example on their spread betting page. Anyway, if you're not a UK citizen then it is up to you to check your national legislation on this matter. The companies themselves have regulatory fees and taxes to pay and these will be included in your buy/sell spread.

All of which means that you can either trade the standard futures and options contracts, as you would with a broker, or you can use the various exotic binary bettting instruments, or, of course, a mixture of the two. I will mainly be looking at the binary bets as there is less written about them and, despite their apparent simplicity, there is the need for just as much analytical muscle as any trading instrument. A misunderstanding of how some of these instruments work can easily result in having a correct view of the underlying market and yet mysteriously losing money on the deal.

I will mainly focus on IG Index as a trading platform. Mainly because it is my primary account but also because they have developed the broadest range of binary betting instruments. There are other platforms and I may in the future broaden my comments to include these.

I will also be including trading strategies and only the future will tell whether these will do well. I am obviously opening myself up to potential ridicule but, well, if the analytical articles prove useful then my job has been half done and you can safely ignore my pitiful attempts at actually trading. But one of the most important trading tools is your own personal trading diary. Unless you are blessed with divine foresight, you are otherwise likely to forever be chasing the market's tail. Your diary will be a stark reminder of the walls you have banged your head against and all the Scyllas and Charybdises that have sunk your deposits. This is my version of a trading diary.

Abbandonate ogni speranza!

RM