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Trading Strategies This section covers the following trading strategies:
PAIRS TRADING
NEWS TRADING
Trading, whether CFDs, shares, futures or spreadbetting, should always involve a trading strategy to determine how you are going to trade for the longer term. Of course the product you are dealing in may to some extent determine the type of strategy you adopt, for example share dealing, with the addition of stamp duty and generally higher costs, may preclude short term trading. That said, the ultimate goal is to predict with measured degrees of risk and accuracy, the probability of either a price going higher or lower. It seems an obvious statement, but so many times in our experience, we have heard clients blame an instrument for losing money, for example "these CFDs are rubbish", or "share trading is for losers". Harsh, but true. The fact is that the products are almost irrelevant because they are essentially the same thing. A Spreadbet is in essence a contract to pay the difference in the buying or selling price ie. a derivative. Shares traded on T+25 or long term settlement are still banking on a profitable difference between the buying and selling price....etc etc.
The point is that often, in losing periods, a trader will blame virtually every other factor for losing, such as commission rates, a bad spread, a poor platform, a missed stop. etc etc. Isn't it strange that when the same trader is going through a successful patch, these factors suddenly become irrelevant.
This highlights that the most important part of becoming a successful trader.... Develop a strategy to suit your trading environment, DONT let your trading environment determine your strategy!
Trading is a business like any other and should be run as such. Take a restaurant as an example. If you were running a road side cafe (safe to say the lower end of the market), you would be more susceptible to cost increases, cost increases which if too large, may significantly harm your profits. You therefore become at the mercy of your supplier, and less reliant on the quality of your product. If you were running a Ramsey restaurant, whilst a cost increase may reduce profits or you may be forced to increase price (strive for slightly better performance), at the end of the day, you will still be a success. Why? Because you have faith that the product you are providing (the strategy) is successful.
The moral of the story is, get the trading right, and the rest will follow!
At Equitrade, we use our own trading strategies to advise our clients, but at the same time we recognise that there are many, many more strategies one could follow. Below we outline some of the more common of those.
Pairs trading generally involves taking opposing positions in similar or almost identical assets in the hope that the effect results in one outperforming the other to yield a net profit.
For example, in the case of Share CFDs, one might choose to short Glaxo and at the same time buy AstraZeneca. In our view, it is often a more appropriate strategy for fundamental, value based strategies rather than short term technical analysis approaches. Often, over the short term, one can expect to see shares within the same sector to move broadly in line with one another. If there is a divergence this would normally be due to fundamental factors such as earnings, profit expectations, industry news etc.
For example, if during the reporting season, in the week AstraZeneca releases earnings figures the same week as GlaxoSmithkline, Astra reports poorly and Glaxo favourably. One might short AZN and go long of GSK in the hope that over the short term, investors may switch from one to the other. Often this can be a successful strategy over the very short term on the basis of a 'knee jerk' reaction, but ultimately, any switching when it does occur, such as from fund managers, will occur at a much later time. Therefore, the strategy here may have been more suitable for a longer term asset such as an ordinary share, rather than a CFD.
Pairs trading, in our view represents less of a successful strategy than it did say ten years ago. Within the framework of a more globalised economy, more diversification, and the neccessity for firms to become a one stop shop for all, finding a 'true pair' is becoming increasingly difficult i.e simply being categorised in the same sector does not neccesarily mean you are competing in the same market.
Pairs trading may, in our view be a more appropriate to futures trading at Index or sector level. Here, one is more immediatley aware of shifts in short term asset allocation and funds than anywhere else. Poor economic data from the Bundesbank in Germany many cause the Bunds to fall, whereas positive data from the US may cause the T-Bonds to rally. The response is normally immediate and is a characteristic of those particular markets, where the type of investor and trader often has a shorter term bias and can react more quickly. Here, technical analysis is more relevant and is more likely to spot a potential divergence.
Direct Market Access
Direct Market Access, or as it is often called 'Level Two dealing' is not only a method of executing orders directly in the market, but a strategy in its own right. For a detailed, beginners guide to DMA please click here. This section will cover more of the most common methods of trading using DMA and assumes the reader has some experience with the product.
Order book analysis
Delayed RSP quotes
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Warning: Trading Contracts for Differences (CFDs), Futures and spread betting carries a high level of risk to your capital, and is not suitable for all investors. Only speculate with money you can afford to lose. Trading or placing any bets can result in consumers incurring liabilities in excess of their initial stake. Please ensure you fully understand the risks, and seek independent advice if necessary. Equitrade CFDs is a trading name of Equitrade Markets Ltd, a company authorised by the FSA to provide advice on spread betting, CFDs, futures. options and rolling spot foreign exchange. |
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