Financial Gossip

Direct Market Access, otherwise known as DMA quite simply ‘does’ what it says on the box; less simply, what actually is Direct Market Access?

So, DMA gives you direct access to the market, simple enough. More importantly are the advantages that DMA gives a trader, which are often key to finding that all important edge in trading today’s financial markets.

Let’s look at the simple diagram below to see the two main types of price and execution service which are on offer for those wishing to trade. DMA & Market-Making (M-M).

As you can see the key differential is that DMA gives you access to a market place where thousands of market participants compete to trade. These participants include individuals or institutions day trading, hedging, speculating, or investing. Institutions such as pension funds, insurance companies, banks. In fact most institutions need access to the financial markets in some shape or form; especially ones who derive revenue from overseas or indeed buy resources from overseas. MM by contrast is a market place with just ONE market participant – the single market-maker/dealer. And some market maker systems will have dealer intervention, which results in slower execution speeds and probably re-quotes.

The advantages:

PRICE TRANSPARENCY

An everyday comparison of the above could be the price comparison websites for insurance Vs the single insurance company. What could be better than having access to all the different prices offered by loads of insurance companies for any particular product? This gives buyers the ultimate in price transparency, producing extremely competitive prices for shoppers. The fact that these price comparison sites are abundant for not just insurance but flights, holidays, car hire, electrical products is evidence of their popularity and benefits; in fact such sites are available for practically any product you could think of, including electricity providers!

Well the same price transparency exists with DMA trading, where having access to thousands of these participants gives competitive prices and super liquidity. If the price given to you is just from one provider or market-maker how do you know it always reflects the price of the actual underlying product….and rarely can a single provider offer the same liquidity that an actual market place can, especially in volatile markets!

SPEED

With pure DMA there is no intervention by a dealer. So when your order is submitted it travels directly to the underlying exchange, without any order routing or intervention. This increases the speed of execution considerably. This is one of the main reasons City trading houses use DMA technology as low latency is crucial when dealing with volatile markets, and institutional traders need to know they can execute their orders in a fraction of a second. Also algorithmic traders, whether institutional or individual insist on DMA as their execution method, as any re-quotes or latency will inevitably produce an extra trading cost/slippage which could make a profitable system unprofitable.

DEPTH OF MARKET

With a DMA system you can view depth of market, which shows not just the best bid & offer available, but also all the orders below and above the market. This allows you to gauge liquidity on both sides of the current price and time you order entry accordingly.

Below is a screen shot showing the depth of market on the ProSpreads professional platfo:

This screen shot is for the FTSE 100 and shows the orders by volume available at each ½ point above and below the price of 4805.5. This depth of market screen (often called a ‘ladder’) is the most popular way to execute orders with a DMA platform. It allows a trader to see all the orders above and below the current price and actually place any order on the ladder itself; whether it be a limit or stop order. This advanced trading functionality also gives day traders a visual representation of their position, as entry and exit levels are visible on the ladder itself.

The good news is DMA is now available to all traders; not just the pros sitting in the City trading houses, but all of us. And if those professionals are using it, then that surely speaks for itself…

This article was written on behalf of Capital Spreads. Please click here for more information on  Spread betting or Trading Platforms.

Today’s markets pose significant challenges to those seeking trading profits; despite the volatility experienced over the last couple of years. In contrast, markets of 20 years ago held a plethora of trading opportunities, often obtainable from trading just one product or even one stock. So why have things changed so much? Quite simply we have more market participants embracing ever changing technology resulting in a more mature market where opportunities are not so apparent and need to be weeded out and traded with the ultimate precision and efficiency.

That’s not to say that opportunities don’t exist in abundance in some of the emerging marketplaces; but here exists a notoriously volatile and illiquid climate, often taking control away from the trader.

To maintain a degree of control, we need to focus on the more mature markets, where our trading can follow a pattern ensuring swift and accurate execution of our directional orders.

So how do we find these opportunities and how do we trade them?

Strategy & Signal Generation

Firstly we need to define our trading strategy. This ultimately means identifying what set of circumstances result in us deciding to enter and exit our trading position.

We could spend hours manually scouring charts or fundamental reports looking for instances where our strategy criteria fit. But that is unrealistic, so we need to utilise the scanning technology available. If we have a predefined strategy and an automated means for searching for products where our trading criteria fit, then we are half way there. We all know that to have a strategy is crucial for successful trading; however the means by which we execute that strategy is of much greater importance. It is fair to say that you can succeed with an average strategy and excellent discipline but not with an excellent strategy and average discipline. So we need to have a plan, but more importantly, an effective means of executing that plan.

When we have our plan or strategy we can code the rules into a software programme, which in turn analyses market data, and generates our trading signals based upon our predefined trading criteria. Here our trading system is born.

Back-Testing & Optimisation

Fortunately we do not need to be computer programmers to be able to turn our rules into code, as many software programmes have easy to understand language and wizards to take you through the process, step by step.

Having programmed our rules into the software, we can back-test these rules on historical data, to see how it would have performed in the past. This is by no means a guarantee of how successful your strategy will be going forward, but it will give you an indication as to the potential of your trading strategy.

By reviewing the back-test performance results, a trader can optimize the variables of his system to refine the profitability. Once again, some of this optimisation can be automated with the software itself identifying which variables would increase the historical profitability.

Trading the Strategy – Simulation Vs Live

We can take our development to the next level since some software programmes allow you to then test your strategy in a simulation environment. Allowing you to trade the market without risking any money is the ‘icing on the cake’ as far as testing a system before going live. However for a few reasons there is never a substitute for actually trading the market. Trading factors like slippage and part fills, which often occur in the real world, can have a significant effect on a system’s performance. Let’s face it, if this automation process of developing a trading system resulted in a guaranteed money making machine, then we would all be sitting back counting the money.

It is often the way we execute the signals that our system generates that makes the difference between success and failure.

We all know that discipline, or more accurately a lack of discipline, is probably the number one reason some traders fail to make money and after all, we are human and prone to emotion, which is more often than not the catalyst for poor and irrational trading decisions. The problem is that discipline is not always easily learnt, and certainly not overnight! However there is an overnight solution to adhering to a trading strategy and that is ‘Automated Execution’. It is incredible that even when our trading system is shouting ‘buy’ or ‘sell’ we still sometimes struggle to pull the trigger as our emotions on what we ‘think’ is happening in the market take over and result in us avoiding commands to trade.

By automating our execution too we have developed a true front to back automated trading process.

Automated Execution

‘Automated Trading’ per se can now be described as the identification of strategy criteria, signal generation and execution of that defined strategy… all automated.

It sounds like we are just generating a computer to do all the work. Well, to a certain extent we are, but the markets are forever changing and we need to have some flexibility in what we do to accommodate those changes.

However some strategies have their logic ‘locked’ away, so that individuals can use or subscribe to those signal systems without full view of the thoughts processes and methodology that are behind them.

Black & White Boxes

A ‘Black Box’ is a term used to describe a ‘closed’ or ‘sealed’ trading system. By this we mean an algorithmic strategy which generates signals in any chosen market; but which cannot be changed or adjusted. It is then possible to have the trading signals executed automatically, without you ever lifting a finger. This is perfect if the Black Box strategy is a good one, and some of the good ones may stay profitable for more than 5 years, but many start out as winners and soon loose their inherent effectiveness and cease to be profitable…very quickly.

An alternative, which is becoming increasingly popular, especially amongst trading institutions, is the ‘White Box’ system approach.

A ‘White Box’ system is subtly different to the Black Box, in that it is your personal algorithms that make up the strategy. The advantages of this approach is the ability to easily tweak or adapt the system to changing environments or market circumstances; whereas a Black Box is closed and does not allow any adaptation to the ‘factory fitted’ capabilities.

Algorithmic trading, in particular using the White Box approach is rife in the hyper- competitive trading world, as financial institutions now feel the mounting need for technology that aids their unique trading style. With the White Box approach it is possible to rapidly compose or evolve algorithms to monitor, analyse and respond to market events in a specific way.

Although the pre-defined Black Box algorithmic strategies are a great place to learn the ins and outs of automated trading systems, the user defined White Box approach had greater flexibility and therefore greater longevity.

The advantages of automated trading

The automated execution has the head line advantage of removing you, or should I say your emotions from the final decision of whether or not to push the trade button. If you believe in your strategy then you should trade it whatever the market feels like at the time of signal generation. To have the link between signal generation and trade execution taken care of by some automated process, means that discipline is maintained even during the most volatile market phases.

• The transparency of most markets means that the edge is harder to find. Automated algorithmic systems can scan multiple markets looking for a criteria fit.
• Trading psychology and discipline are difficult to master. Automatic execution removes the emotion from trading, making it easier to follow your strategy precisely.

The disadvantages of automated trading

Nothing is guaranteed when it comes to trading the markets and guaranteed profits with automated trading systems is no exception.

• If your trading system is not properly coded and tested, then profitability is unlikely.
• Sometimes it is impossible to put certain rules into code, which makes it difficult to develop an automated trading system.

As trading technology continually advances, the race is on to find algorithmic supremacy. As a result some strategies are becoming forever more complex, demanding a greater need for automation. Now that the execution of trading strategies can be automated, the risks of ill discipline and human irrationality have all but been removed.

Simon Brown

Managing Director

ProSpreads

www.prospreads.com

Fact: We all have a view on the market

Reality: Its not always the right one !

Fact: Sometimes our view is correct

Reality: We don’t always make money !

Frustrating I know, but we need to find the right product to trade; and more importantly the right style.

You can imagine the rollercoaster ride than many traders experienced during the volatile markets of the last fifteen months. You only have to look at the daily ranges that indices like the FTSE 100 had in the autumn of last year to appreciate that white knuckle rides are not even the preferred environment of the most savvy of traders.

I remember last October and November, and I am sure you do too, knowing that when the market closed in the afternoon at 4.30pm, it was likely to open either a few hundred points higher or a few hundred points lower, purely dependent on the direction of Wall Street from 4.30pm to 9.15pm.

How can we predict or more importantly make money out of holding a position in a market, which we cannot trade and know is going to ‘gap’ up or down by a huge amount the following morning. Sounds like a massive gamble to me.

Actually we don’t need to hold onto positions forever in the vain hope that we will make a fortune at some point in the future.

So what’s the alternative: a relatively low risk, controlled strategy of buying and selling within very short timescales, taking tiny margins of profit…buts lots of them. Welcome to the world of day-trading

A simple definition: Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions will usually, but not always, be closed before the market close of the trading day.

So who are today’s day traders ? Well, pre-tech boom (& bust), day traders were predominantly self financed ex-bank and futures floor traders, who stood shoulder to shoulder in the open outcry pits of the International Futures Exchanges, shouting and screaming while signalling to each other the prices at which they wished to trade. Mayhem it must sound, but actually there existed a very efficient market place for trading the financial markets. Some of these self- financed traders, otherwise known as locals, would wander down onto the floor, sometimes straight out of  school, hungry to make their fortune… ‘Trading Places’ style.

In the late 90s, technology soon won the exchanges over and these thriving day traders migrated to newly set up ‘Trading Arcades’; providing them with  a professional dealing environment, allowing them to compete with their banking and corporate peers. And these arcades initially accommodated hundreds of ex floor traders who provided important liquidity to the worlds futures markets.

And then the millennium saw a 3 year bear market that took the FTSE 100 from 6950 to 3380, a whopping 51% decline, well within the definition of a bear market (20% decline !) This down move made many active retail investors, who to that date were nearly always ‘long only’ merchants, look for instruments and strategies that would allow them to capitalise on falling markets as opposed to good old bull markets. So the search led them to the derivatives markets, including Futures, CFDs and Spread Betting.

Speculating on intra day moves may mean one or two trades a day or may be hundreds of trades a day. To be glued to a screen , buying a and selling on a second by second basis has created a new breed of trader called the scalper.

A scalper looks for a tiny (and I mean tiny) edge in the market. This may mean ‘scratching’ (buying and selling at the same price)  several trades for every profitable trade.

Many of these scalpers will trade spreads between either different products in the same asset class or indeed different futures months within the same product. This spread trading requires immense concentration as a badly timed tea break could prove expensive !

A short term interest rate futures contract, for example, will have several months available to trade. Day traders will study the fair value of one month against another (spread) and when a big order in one of those months moves the price, then there is an opportunity (if you are quick) to trade the other months before they fall in line again. This is where execution technology is crucial, as there may be hundreds of spread traders trying to do the same trade at the same time.

Similarly, some spread traders, will choose to trade one contract against another. For example, it is increasingly popular to trade one index against another: the FTSE Vs Dow seems particularly popular at the moment.

In the equity markets, ‘Pairs’ trading is common place, whereby a trader will find a stock within a sector that he feels is strong, go long, and hedge it by shorting a stock within the same sector that he feels is relatively weak. So he is protected against a sector fall out and hopes that the spread between the two stocks will widen/narrow in his favour.

Another favourite is in the oil market, where the ‘crack spread’ is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more of the refined products, typically gasoline and heating oil.

Here are two charts: one of the Dow and one for the FTSE 100, over the same period, which was 04/12/09 from 1430 to 1630 (UK Time)

You can see that both Indices moved in a similar direction in each 5 minute period, which is represented by each bar on the chart.

In this instance, the Dow moved and the FTSE followed. This a common theme for the FTSE, once the Dow opens at 1430 every afternoon, and many traders see this correlation as an edge.

Quite simply they will watch the Dow, and I mean watch (without blinking sometimes !) until it suddenly moves, then jump on a trade on the FTSE, knowing that it will most likely follow the Dow.

We saw this at 1500 above, when the Dow moved sharply downwards and the FTSE followed. Looks easy, but you have to be quick with the right technology that will not re-quote you.

Look again at the last 20 minutes (4 bars) on the FTSE chart and you will see that it takes a mind of its own and trades down to the close at 1630, when the Dow stayed steady over the same period.

There could have been a number of reasons for this, but my odds on favourite is the day traders were long and needed to sell to close their positions for the day.

Many think trading is a zero sum game, meaning for every winner there is a loser. But I don’t think this is the case, because you may have a short term day-trader selling to pension fund; the day trader looking for a few points profit and the pension investing its premiums for long term growth.

Whatever your style, there is no such think as free money; but  day-trading can give you an edge and at least allows you to go home and sleep at night, without being exposed to the sharp moves from the other side of the pond.

Simon Brown

Managing Director

ProSpreads

Walking through the streets of London EC3 you may notice a growing presence of 30 somethings. Not pinstriped brokers or chino clad merchant bankers frequenting the coffee houses on dress down day, but designer jeaned young men sporting trainers and five o’clock shadows. ‘Builders’ I can here you muttering – no, they are a growing breed of trading professionals known as arcade traders.

So why have we not heard of them before? The answer is quite simple. These traders are low profile, silent but aggressive and masters in the provision of liquidity. Every day, they enter the square mile before all others and leave quietly as the markets close. But their background could not have been more different. Many cut their teeth in the 80’s and 90’s as pit traders on London’s open outcry futures and commodity exchanges.

As technology transformed their coloured jacket, chaotic workplace into electronic serenity, many of these high-profile traders gently melted into obscurity.

Hence trading on computers finally took over in the late 1990s. With this astonishing transition, these open outcry traders have had to adjust to electronic trading, which is a far cry from the aggressive hustle and bustle of the futures pit; unsurprisingly many have failed and have quietly slid back to their home counties to take up less stressful pursuits.

Those surviving arcade traders are true professionals; both silent and aggressive, they are specialists in their field. Although unknown, they are an essential ingredient in today’s financial markets.

Whether it be banks wanting to unwind large positions or private investors requiring a consistent two way price, it is these arcade professionals who predominantly supply the market. They are undoubtedly ‘the liquidity providers’ and without liquidity, an efficient market fails to exist.

The arcade trader is either a self financed individual, often with years of experience, or a graduate fresh from college with no bad habits. The latter, who initially may be financed by the arcade, can be moulded, taught a strategy and told to execute it like a machine. Some arcades have rows of graduates executing different strategies for trading the markets, some succeeding, many failing. In this Darwinian world, only the fittest, most disciplined survive.

Trading arcades are not a free ticket for those wanting to trade. All prospects are sent through rigorous training and initiation tests. For example, all new recruits may be asked to play various video games to test their ability to react to certain commands and to test their awareness of what is happening on their screens. These two qualities, awareness and ability to react are two of the foundation skills of any successful trader.

So in what environment do these silent traders operate? Well, today’s arcades are state of the art dealing floors, with the best in dealing software and information systems, catering for what can be hundreds of self-financed trading professionals. Orders can leave a trader’s computer, get submitted to a futures exchange in Chicago, executed and confirmation returned, all within a quarter of a second! This speed of execution is essential when these professionals are sometimes executing hundreds of trades a day.

The silent traders will trade anything that moves from equities to commodities to currencies to bonds. Many traders specialise by just trading one instrument, day in day out for years on end, allowing them to ‘get to know’ the instrument so well that it becomes one of the family. They know how it behaves, they understand its moods – ultimately they live it!

Succeeding in a trading arcade is all about having the edge; some traders consult sports psychologists, who are able to teach them the discipline required to be a world champion athlete, some may learn the art of Zen. Whatever works for one trader, may not work for another. What is required in all successful traders is a strategy and the discipline to follow it – easier said than done, I can promise you.

So what is the future of the trading arcade? I believe the trading arcade is the future. Although broadly undiscovered, these dens of liquidity bridge the gap between private individuals and investment banks; without them markets would fail and in some cases cease to exist. Trading arcades are emerging everywhere to cater for the hungry trader wanting to trade his own capital within the professional infrastructure normally associated with institutional dealing floors.

And not just in the UK…. with more and more of these professional traders emigrating to sunnier climes, where the best in trading technology is readily available, coupled with a more palatable tax regime !

Simon Brown,

Managing Director

ProSpreads

www.prospreads.com

Any intervention makes sense at the time. After all it is human nature to try and prevent an undesirable event taking place. Animal preservation for example, and don’t get me wrong, I am a conservationist by nature (no pun intended) but can you actually stop a species becoming extinct once the total numbers get to such a low level? Are we not just slowing down the process to an event that is inevitable?

I believe the same occurs in the financial markets, but with the ‘double whammy’ that intervention may actually increase the severity of the event when it finally occurs.

Let’s start by looking at the Banking Crisis of 2008. We let Lehman’s go but saved AIG, Lloyds and RBS, for example, along with many others, with an aggressive round of quantitative easing by central government. Printing money and dishing it out, for all intent and purposes. But are we not just avoiding the inevitable i.e. severe economic depression as the result of too much debt being allowed to accumulate, not just for corporations, but also individuals? Oh, and with a possible side effect of hyper inflation. I remember the papers talking 10 years ago about the excessive levels of personal debt; and 110% mortgages should have been the real alarm call!

Now in Europe we have individuals, corporations and countries in trouble and we are attempting to bail them out, but with what money? Is it just passing debt around from one country to the next? Sub Prime springs to mind…

In 1992, the Bank of England attempted to support its currency by continuous buying in the vain hope that it would be sufficient to keep sterling within the boundaries of the European Exchange Mechanism. It did not work, resulting in the withdrawal from the mechanism, releasing interest rates to freely float to ultimately where they should be.

So where am I going with this?

Well, Europe is in trouble as a result of several of its member nations struggling with sovereign debt. And we are trying to save them by loaning them more money; loans which got them into this state in the first place. Everyone knows, if you drive across Europe passing from one country to another, you see immediate differences. Language being the first, then culture, values and varying levels of economic prosperity. However, the European Union has attempted to converge these differences by setting the same rules and boundaries for all of them; not forgetting giving them all the same currency? In my eyes this was never going to work; it was just a matter of time before it all went wrong, because the member countries were all at different levels of development, created by differing histories and ethics. It only lasted as long as it has done because we have been in a phase of global economic boom, since the European Union was created almost 15 years ago.

More recent interventions….yesterday the National Bank of Switzerland was rumoured to by selling its own currency to provide support to the Euro. The German Chancellor announces restrictions on ‘short selling’ of some of its own listed companies… I wonder what would happen if we just left the economies to sort themselves out, Darwinian style.

So looking at the markets, and we are all traders at heart, intervention rarely works in the end and often just makes the bubble bigger before it finally bursts.  This means that a breakup of the European Union is more likely than many believe, a double dip, with the second one much bigger than the first more likely than many believe and countries defaulting on their debt and freely floating their economies to where they should be, more likely than many believe. Actually, in the long run this may not be so bad at all and the Euro may well come under renewed pressure, which is great for exports, but only if Europe actually survives.

Lots of questions, I know, but hopefully some food for thought.

Let’s put the spotlight on the FTSE 100. This is the most popular product amongst all spread betters, professional and retail alike.

The index of the UK’s 100 highest capitalised (market) listed companies, (representing over 80% of the total capitalisation of all the companies on The London Stock Exchange) has an interesting history, and with all the uncertainty not just in the UK economy but economies globally, we need to step back and look at the market from a distance; putting everything into perspective.

Looking at the big picture, let’s see what has happened since the FTSE 100 index was born back on January 3^rd 1984 at a nice rounded value of 1000…

The chart above details the meteoric bull run from a value of 1000 in 1984 to over 2400 in 1987. That’s a 140% climb in under 4 years! Then came the 1987 Stock Market Crash in October 1987. I remember this well (excuse me while I reminisce)…

I started as a ‘blue button’ (glorified tea boy) on the stock exchange floor in December 1986, fresh out of school and keen as mustard. The problem was I hardly knew anything about the market (literally nothing). The market was booming, the Big Bang’ had hit the city and trading companies were flourishing, as investors saw the market as a one way bet. As a result the market making company I had just joined had me off the ‘making tea duty’ and trading in the pit on my own by March 1987. Naturally my strategy was one that everyone had used for the past few years i.e. geared to a rising market, so I soon learned just 7 months later that markets can actually go down and subsequently graduated from the ‘school of hard knocks’.

The 1987 crash took the FTSE 100 from over 2400 to 1600 in just a couple of days, wiping out over half the gain of the previous 4 years; then another 2 years to regain those losses. You can’t argue that markets fall quicker than they rise!

The markets continued to rise steadily during the first half of the 1990s, with a few hiccups along the way naturally, mainly caused by speculators looking for another crash scenario. Then came the ‘Tech Boom’ which propelled the market from 3000 in 1995 to 6950 at the end of 1999. Not only was it the end of 1999, but it was the end of the heavily inflated speculation of the impact of the Internet and its potential.

The market plummeted over the next 3 years; and for those Technical Analysis believers amongst you, the market retraced exactly 61.8% from the move of its origins at 1000 to its high of 6950….’The Golden ratio”.

After another boom and banking crisis bust we saw a ‘double top’ (hindsight I know) demonstrating the importance of the market holding that level of 3500/3700 a year ago.

Since those lows the market once again has shown extraordinary resilience and climbed back up to its current levels of 5700/5800. It has been tempting to short this 12 month rally, especially as it has felt that the economic stimulus provided by governments around the globe was artificial and probably delaying the inevitable; however the market has continued to grind higher.

Has this market moved higher on fake stimulus? Are we pulling out of recession? Whatever your thoughts and even if they are right, it does not mean the market will behave as it should. One thing is for sure, quiet stock markets tend to drift higher and its speculators as a whole rarely sell the top or buy the bottom (myself definitely included !). But when the market is short and the markets are quiet, we will go higher. And never has that been more true than the last 12 months. With the markets quiet running up to the UK election, the FTSE 100 Index is staying firm and may well go higher; however I have noticed that the sentiment is shifting from bearish to bullish; which probably means many of the short positions have been closed out and reversed suggesting we may be near the top again.

Either way is it worth keeping an eye on sentiment, because when we start seeing newspaper headline of ‘FTSE 100…set to reach 7000 by year end’, watch out for a down move.

I remember a front page headline 12 months ago when the FTSE 100 was trading at 3700… ‘FTSE 100…heading for 2500’…..

Simon Brown

Managing Director

ProSpreads Limited

If you have not tried it before, now may be time……

Swing Trading is rife and sits firmly between long-term trading and day trading.

It is probably the style of trading that has grown the most in the last 5 years and current market volatility provides the ideal climate to put your swing strategies into action.

Swing trading essentially captures the relatively short-term trend oscillations which occur in most markets and in particular, the equity markets. The key to successful swing trading, is picking the right instruments to trade, as some equities ‘swing’ better than others. It is usually the large cap stocks which are the best, as you can benefit from both volatility and liquidity.

So, as a swing trader you will be attempting to capture the up swing by going long and then reversing the position on a down swing. The difficulty is not really in capturing the swing itself, but moreso the instruments or stocks that are likely to oscillate, as oppose to trend.

For longer term trend trading commodites and forex are often the best to trade because their movement is reflected by macro economic events which create a basis change over a period of time resulting in a prolonged trend in a particluar direction. It does not mean that there are not opportunities to swing trade during a trend as there is nearly always oscillation caused by short-term changes in sentiment or behaviour of the market particpants themselves.

Swing trading during a strong market trend does have its dangers as it is more difficult to spot the ranges and sometimes the product will move in a straight line for extended periods, which will ultimately result in  the stopping out of positions too often…a predicament I am sure we have all been in before !

So the swing trader is best positioned when markets are going nowhere and typically may reverse his position every few days or even every couple of weeks. For those wishing to automate their trading, swing trading is the ideal time frame to do this, as slippage has little impact on profitability. Also exit levels, on both the profit side and loss side, are more easily defined.

Indices are a great product to swing trade, as they often move in one direction for a few days and then reverse and move in the opposite direction for a similar period. No better example than the FTSE 100 over the recent 2 months during which the uncertain economic climate has limited any catalyst for definitive direction or trend.

The FTSE 100 Index chart illustrated above shows the daily price action during the run up to the end of 2009. Now all contracts move in a saw tooth pattern, even when they are trending; however there is no better swing trading opportunity than when the market is trading sideways. Your swing point can be defined using a number of technical studies, some of the most common being moving averages, relative strength indicators and stochastics.

Once the sideways channel is in motion then catching the swings is relatively straight forward; however as with longer-term trend trading, spotting that a market is in the particular formation is the difficult thing.

I think a great way to make this identification easier is to trade the swings whether the market is moving sideways , upwards or downwards, but if trending, always trading in the direction of the trend.

Swing traders are not looking for the home run every trade but look to take small bites out of the market, with relatively low risk entry and exit points. They are not concerned with necessarily buying at the very bottom or selling at the very top, but wait for confirmation that the market has reversed before jumping on board the swing.

So entry points can be recognised fairly easily using studies like moving averages, where an upswing maybe in play when the price action moves above the average, and vice versa, a downswing when the price action moves below the average. The real art is placing your stop loss at a right point, when the market defies your technical study and continues to trend out of your trading range.

Swing trading is common amongst day traders and longer-term traders as it offers regular opportunities to close a position and start again; whereas positions held for weeks on end can often result in boredom or ill disciplined trading decisions.

Automated signal generation and execution of swing trades is verging on the norm, as the trade frequency is low enough to reduce the impact of slippage and trading costs on profits, with trade length long enough to catch a mini trend within the range.

I know many a day trader who combines there active intra day scalping, with a slightly less stressful swing trading strategy. The good news is that markets always have and always will oscillate, providing the perfect opportunity to capitalise on the swings that often are the result of sentiment and therefore likely to reverse…

Simon Brown

Managing Director

ProSpreads

Since the daily focus on the European sovereign debt crisis has waned, there is renewed interest on the UK and particular Sterling.

The effect of the general election in April was undoubtedly overshadowed by the events in Continental Europe, so whatever view traders had on the UK, it was almost irrelevant given the impact of the crisis in Greece. But on face value the coalition government seems to be working, a proactive emergency budget has been delivered, and as a result the UK looks in relatively good shape, with sterling strengthen substantially over the last 2 weeks Against the US Dollar, the pound has rallied from 1.41 to over 1.50 today; and against the Euro rallying from 1.15 to over 1.23 over the same period. ProSpreads clients have done well over the past few weeks being long of sterling and short the Euro; also recognising that relative to the rest of Europe, the UK currency is not a bad bet.

When people first look at spread betting, the whole concept can appear confusing – especially with all the jargon – yet the overall concept is actually quite simple and the ‘financial spread’ is not too different to traditional share purchasing.

If you wanted to look at traditional shares, a stockbroker would quote two prices. The lowest price is what you would get if you were to sell the shares – the ‘bid price’. The higher price given is what you will pay when you purchase shares and is known as the ‘offer price’. The difference is called the ‘financial spread’.
With spread betting, you also have two prices quoted to you and they are also called bid and offer prices.
The difference with spread betting is you never actually purchase the shares you wish to trade on. Plus of course, you can spread bet on almost anything, not just shares.
If you think that the share, index, market or anything else you are spread betting on is going to increase, then you ‘buy’ at the offer price (the higher one). If you think it will decrease, then your spread bet starts at the bid price (the lower one).
To make your profit, you must cover the cost of this financial spread so if you place a ‘buy’ spread bet then you are not going to make a profit unless the price rises higher than the price you ‘bought’ at, in other words your spread bet must cover the financial spreads to make you a profit.

Most people who are serious about making money through spread betting will soon wise up to the fact that you need to get to know your market in-depth if you are to avoid simply ‘gambling’ your money. Spread betting is also known as spread trading, and to make serious money in this way you need to be a trader and not just ‘bet’ your money away.
You can bet on the spreads for almost anything these days, from currencies and foreign exchanges to individual shares and indices or almost any market that can be measured.
A responsible spread betting company will advise you that spread betting, like any form of investment, can increase or decrease. Any advantage you can take, and in this case knowledge, will help minimise your risk.
There are many economic factors that can affect the main markets for spread betting, such as the price of currency and for your market, you need to learn what these are. In most cases, these economic factors are reports or data releases that have some form of predictive value. Investors based their decisions on these things, so if you are spread trading shares you might see the value of such shares increase or decrease rapidly before or afterwards and this information can make you a lot of money if you can anticipate the movements.
A few examples of such economic data include information on a country’s Gross Domestic Product (GDP), price indices such as the Consumer Price Index (CPI) or Producer Price Index (PPI) or interest rate changes.