Spread Betting Strategies

Trading strategies form the basis of market speculation decisions. They provide the rationale for entering trades, guide holding positions for optimal gains, and indicate when to exit trades to minimise losses or secure profits. Successful traders use these strategies to achieve consistency and enhance profitability.

There are two main schools of thought: technical and fundamental analysis. Technical analysis focuses on price movements and chart patterns to predict future trends, while fundamental analysis examines economic indicators and company financials to determine asset value. Many traders combine both methods to create personalised strategies that leverage the strengths of each approach, improving their chances of success in financial markets.

Fundamental Analysis

  • Income Statement: Shows revenue, expenses, and profits.
  • Balance Sheet: Snapshot of assets, liabilities, and equity.
  • Cash Flow Statement: Details cash inflows and outflows.
  • Economic Indicators: Factors like interest rates, inflation, and GDP growth.

Industry Analysis: Evaluates the company's industry position and market share.

Key Ratios

P/E Ratio: Price per share / Earnings per share (EPS)

This is the price per share/earnings per share. Effectively the price you pay to receive $1 of earnings. Low P/E means a stock is cheap, typical of stable mature industries that have low growth potential. High P/E means a stock is expensive, typical of young industries with high future potential.

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P/B Ratio: Price per share / Book value per share

This is the price per share/book value per share. Book value is defined as the company’s total assets minus the company’s intangible assets and liabilities. Low price to book could mean the company is cheap or there is something inherently wrong with it.

ROE: Net income / Shareholders' equity

This ratio is the amount of net income returned as a percentage of shareholder equity. ROE measures a company’s ability to generate profit with the money shareholders have invested. Higher is better.

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D/E Ratio: Total liabilities / Shareholders' equity

Used to measure a company's financial leverage. The higher the ratio the more aggressive the company is with its financing.

TECHNICAL Analysis

Technical analysis predicts future price movements using past market data, primarily price and volume. Key elements include:

Price Charts: Charts are the foundation of technical analysis. Traders use various types of charts, such as line charts, bar charts, and candlestick charts, to visualize price movements over time. Patterns and trends on these charts can provide valuable insights into market sentiment.

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Volume: Volume is a crucial aspect of technical analysis, indicating the level of market activity. Volume analysis helps confirm the strength of a price movement. For example, an increase in volume during an uptrend suggests strong buying interest.

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Trends: Identifying trends is crucial in technical analysis. Trends can be upward (bullish), downward (bearish), or sideways (neutral). Analysts use trendlines and moving averages to recognize and confirm trends, helping them make decisions based on the market's prevailing direction

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Key Indicators:

  • Moving Averages:
    • SMA: Average of closing prices over a period.
    • EMA: Weighted average, giving more importance to recent prices.
  • RSI: Measures speed and change of price movements (scale of 0-100).
  • MACD: Identifies changes in trend strength, direction, momentum.
  • Bollinger Bands: Measures market volatility with upper, middle, lower bands.
  • Stochastic Oscillator: Compares closing price to its range over a period.
  • Volume Indicators:
    • OBV: Shows volume flow into or out of a security.
    • Volume Moving Average: Average volume over a period.

Conclusion

Fundamental analysis focuses on a company's intrinsic value and financial health, while technical analysis uses past price and volume data to forecast future price movements. Combining both approaches can create robust trading strategies, maximising the strengths and minimising the weaknesses of each method.