U.S. Labor Day Holiday

U.S. markets will be closed today for the Labor Day holiday. Forex markets will be open as normal but will likely be quiet. Other global markets that we trade at LS Trader, such as the Dax and the Nikkei 225 will be open as normal.

Trading volume and volatility will likely pick up from tomorrow as traders and fund managers return to their trading desks. This month in particular promises to be an interesting one for various reasons, not least because stocks are at all time highs and that September is historically the weakest month of the year for stocks.

Good trading

Phil Seaton

How to Use the ‘200 Day Moving Average’

The 200 day moving average is a commonly used tool amongst traders and spread bettors. Since we refer to this quite often in our updates we thought we would expand on its uses so that you can also use it in your own spread betting.

Firstly, there are two main different types of moving averages, the simple moving average (SMA) and the exponential moving average (EMA). Opinions vary as to which is the better version as both have their advantages.

Exponential moving averages

The exponential moving average is weighted towards the current prices so tends to move a bit quicker towards the current market price. Whether that is a benefit is debatable. The main benefit of the exponential moving average is that it smoothes out data spikes quicker than a simple moving average. However, that is less of a benefit in today’s age of electronic trading and reliable market data.

Simple moving averages

The simple moving average has its own advantages in that more people use it than the exponential average, especially hedge fund managers and professional traders. In a study of hedge fund managers, the 50 and 200 day simple moving averages were the most commonly used, therefore these are likely to give the best indication of what other traders are looking at over the exponential moving average.

Regular readers will know that at LS Trader we continually do extensive research on the markets and all different types of indicators, so we have of course tested both types of moving averages and all different periods. The results are perhaps surprising in that most moving averages, especially the shorter term averages used by most traders are of limited, if any value.

This is likely because the shorter term averages are too sensitive to price and are not a reliable enough indicator of a change of trend. The longer term averages, such as the 200 day simple moving average, has more of a benefit as the market tends to cross the average much slower, due to its longer term timeframe.

How to stay on the right side of the market trend

So, how can you use the 200 day moving average in your spread betting? Quite simply, it’s an at a glance measure of the longer term price trend in each market. A market with a price above the 200 day moving average is considered to be in an up trend, and markets where the price is below the 200 day moving average is considered to be in a downtrend. Therefore, a spread bettor can use this as a long term trend filter and look to only take long positions when the market is above the 200 day moving average, and look to only take short positions when the market is below the 200 day moving average.

Why would you only want to take trades in the direction of the long term trend? Simply because trades taken in the direction of the long term trend have a greater probability of success and are likely to run longer, giving them a higher profit expectation. Trades taken against the long term trend tend to be short lived, run for shorter duration and have a higher chance of whipsawing the trader out of the market.

Although the 200 day moving average is a simple at a glance indicator of the long term trend, its primary use really is to see what other traders are looking at and to see how the price action reacts when it approaches the average. Whether the moving average provides support or resistance can give clues about the views of market participants and future price moves.

At LS Trader, we use our own proprietary trend indicators, which we have found in testing to be much more reliable than the 200 day moving average, or any other technical indicator for that matter, but the 200 day moving average still has some at a glance value, even if it’s only so you can see what others are looking at and how the markets react.

We hope that has assisted your understanding of this long term trend indicator and will help your spread betting.

Good trading

Phil Seaton

You can sign up for a 30 day trial of the LS Trader System here

Energy Trading – How to Spread bet the Energy Markets

Energy trading is a hot topic at present as people are very focused on energy prices and these markets are among the most popular for commodities trading. Of course it’s a very simple matter to spread bet the energy markets on any spread betting platform.

There are five main energy markets that can be traded. These are:

  • Crude oil (US)
  • Brent crude
  • Heating oil
  • No leaded gasoline
  • Natural gas

Spread betting these markets carries significant benefit over trading these energy markets via futures trading, which is beyond the scope of most due to the large contract sizes and margin requirements. However, most spread betting companies offer the above markets with spread bets of as little as 10p per point, although most are larger at around 50p. The smallest bet sizes per point I have found on these markets are at ETX Capital.

The spreads on these energy markets are generally tighter for the crude oil markets but are wider for the remaining markets. Crude oil generally has a spread of around 4 ticks, but the others are often as wide as 30 ticks.

Energy trading can be quite volatile and most of these markets have quite large average true ranges (ATR), with no leaded gasoline normally the most volatile. Therefore, even at 50p per point using an appropriate stop to take into account the expected volatility can lead to quite a large bet, so this should be taken into account before opening any trades.

Many novice traders make the mistake of opening a trade and then placing a stop loss after they have opened the trade, generally at their pain threshold, rather than taking into account the volatility and chart structure and then selecting a bet size based on these.

The correct approach is to first use a method of identifying where you would be wrong on the trade and placing your stop just beyond that price, or using a volatility based stop, and then dividing your trading capital allocated for the trade into that amount. That will give a suitable bet size per point. Trading some of these energy markets will be beyond the scope of smaller accounts.

Energy trading can be exciting and profitable and although these markets are generally volatile, they do often trend very well over the long run. At LS Trader we have had some very profitable and long running trends from these markets over the years. This includes back in 2008 when we rode Crude prices up to their all time high at $147 and then also profited from their sharp decline where they fell all the way back to $35 by being short.

According to our proprietary trend analysis at LS Trader, the long-term trends for this sector are currently up, with the exception of U.S. Crude, which is still in a downtrend.

Hopefully this has helped you with your understanding of the energy markets and energy trading.

Good trading

Phil Seaton

P.S. Find out more about the LS Trader system by clicking here