Technical Analysis and Spreadbetting

mmillar

Guest
330 5
Just thought I'd post this information as I have been caught by this situation several times and it might help others. It isn't a lesson on TA, just something to watch out for if you use TA with spreadbetting companies. These charts refer to Thursday 16th January 2003. They are for the Dow but there was a similar chart on the S&P (though it wasn't as clear which is why I used the Dow).

This has nothing to do with spreadbet 'bias' (please refer to this post if you wish to talk about that http://www.trade2win.co.uk/boards/showthread.php?s=&threadid=4516 ). It is just that when you trade the 'cash' on a spreadbet you are really trading the future. Futures are more volatile and move at different speeds to the cash index.


You can see from the chart below that the real Dow index (INDU) made a double top at 8805 then broke down through 8784 which was then a TA sell signal. It is usual in these situations for the index to try and get back to 8784 which has now become a resistance line. You can see that it failed to make this line and subsequently fell heavily (on Thursday and Friday). If you were trading this you would have put a stop above 8784 because a break up through this level would signal that the double top had failed. If you are the daring type you would also have shorted this failure.




Below we have the Deal4Free chart for the Dow Cash during the same period. (In theory every other spreadbet company should have exactly the same chart). Note that this is a chart of the Bid price which is why the numbers I have quoted are slightly different from the chart levels. You can see that the double top occurred at 8802 and the initial downwards break occurred at 8775. Again, they are different from the INDU because they are based on futures. The important thing (and what this post is all about) is that on the return it broke up through the resistance! In TA this break would be a signal to close your position.




Lessons are:

1. If you spreadbet then you should also have the 'real' cash index in front of you. Be aware that when trading SB ‘cash’ products you are really trading futures.

2. You need to adjust your money management to take this issue into account. In the situation described above the INDU failed at resistance. However, if it had kept going up the futures price (and hence the SBs Cash price) would have been even higher before you could get out.

3. You need to be very careful with stops and where you are placing them. I tend to use very tight stops which is why I get caught by situations like this. I am gradually moving to manually getting out of the market, though I wouldn’t recommend this to beginners – you should use auto stops.
 
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Skimbleshanks

1
2,325 16
The placement of stops is an art, not a science. Unfortunately, for most people it is trial and error and I'm sure we've all been in the situation of having a stop hit and then the price sails away leaving you on the quay.

Nice post mmillar, and I'm sure lots of people here will benefit from the vital point you have graphically illustrated.
 

ChartMan

Legendary member
5,580 46
Here's my take on this. The support at 8785 is minimal... One should have been looking for the development or failure of a Head and shoulders. The failure would not be confirmed until the price tested 8800 again. Confirmation would be a reversal for the right shoulder at any point between 8755 and 8785. As always, the DOW will confirm major TA turning points by the price crossing the 100MA (1 min chart/20MA 5 min chart). So a short entry is confirmed at 8758 on the long down bar that crosses through the 20MA. Four ticks later, there is a second confirmation as the price rises and tests the 20MA again, and failing.
Taking the DOW cash chart, doesn't that show that there is a bias, insofar as the price overshoots the real value of INDU?
I'm well impressed by the "magnification" that the dow offers compared to ES, but it comes with pitfalls for the unwary. Moves are amplified by a factor of 10 ish and can lead to the dicovery of interesting " hidden secrets". Unfortunately, some of those secrets we'd be better off not knowing about. The frighteners are also amplified by ten! Still, on balance, the benefits far outweigh the frighteners.
 

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JonnyT

Senior member
2,560 22
My personal view is that such a small time based double top is good for one thing. Shorting for a standard target of the high of the top.

Both the Index and Futures exceeded that target so to me any bounce is not revelent as such tight double tops likely do not predict major turning points.

JonnyT
 

dsmodi

Established member
509 2
Good post mmillar.

Well thought out points made in a well thought out manner - and I include in that the point about this thread being different to the other thread....
 

BrianT

Junior member
20 0
I am currently using CMC to spreadbet and really appreciate this post. Could you give me a good alternative site to view 'real' cash charts?
 

options

Senior member
2,374 218
Only problem with that is the Lycos charts only run when the American market opens. Whereas the cmc dow, S&P run all the time.
So I suppose a good question would be; Does anybody know where you can get S&P futures charts throughout our day, or is it just the sb's that run this chart?


Options.
 
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Skimbleshanks

1
2,325 16
The FREE Lycos charts run only during normal market hours, as Options has said, but if you pay for the service you get out-of-market hours as well.
 
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