Picking a good entry point involves good planning. Opening and closing positions randomly is only likely to lose you money over time. So map out your proposed bet as far ahead of the event as possible, making sure to define the risks precisely.
Stagger your entry
Instead of aiming to enter at one specific price, use an approximate entry range and then adapt to a short-term time frame chart for your exact entry points. This will allow you to stay calm and develop a low-risk, staggered entry.
Build your position by adding small bets each time. Remember, there are no commissions payable with spread betting, unlike with share trading. Take advantage of this by staging entries gradually. If you want to bet at £15 per point in total, you can equally bet three lots at £5 per point.
Look at Puma in chart 1 (below). The share has been trading in the E220 to E255 range. Our aim will be to go short of Puma at the top of this range. In this example, you could plan three entries to keep your risks low.
Chart 1
So, you might enter into the first bet as soon as the price moves into your range and when the overall market tone is in tune with your position at around E250. If the whole market experiences a massive intraday rally, entering before the close at this point is brave at best and will probably look foolish with the benefit of hindsight. Therefore, let the market settle for at least one day.
For your second entry, make it when the market may have moved slightly against you but is still within your entry range. If the price touches a support or another important technical level, this is the right time to place this bet. This happens at E252-E253.
Your last entry is reserved for the beginning of the move in the profitable direction. The position should be giving an indication that it is ready to make the big move you have planned. Point 3 shows a break down through the E245 zone, so that should be your last entry level.
If you decide to day trade, then placing all of your bets at one time may be your only option as you will only have a very small time window in which to operate. In this instance, a single bet with your whole trading amount may have to suffice.
While it’s usually advisable to make multiple entries into a position, this categorically does not mean you should ‘average down’. If the bet moves against you after your initial entry and begins to trade outside the entry range, there is no point in adding more bets to it. Averaging down – the process of adding to losing positions – is the route to fast-track failure.
Stick to the plan
Be confident in your approach. Once the asset's price is in the entry range, do not hesitate to take the first bet. Waiting for an even better entry price is an unnecessary delay and, unless there is some information that invalidates your original analysis, you should not be making any new decisions at this stage. Overconfidence and greed can lead to other problems. Stick to the trading plan no matter how bullish you are on the position, never placing more bets than were first planned.
The most important point is to think carefully about when you should cut and run. You might choose to exit a position at a set percentage away from the entry price, at an historic resistance line or at another technical area such as a Fibonacci or Gann level.
Less disciplined traders will simply cut the position when the pain gets unbearable and this is often a decision of the heart that leads to failure. Having any form of plan, even the most basic one, is better than no plan at all. A number of the most successful traders in the City execute their exit plans with military precision.
To understand the significance of this, I strongly recommend you read Jack Schwager's book Market Wizards, a compilation of interviews with the world's top traders. The oft-repeated rule is to cut losses early, plan for them before you enter a position and always execute with no hesitation. In chart 1, the stop-loss will be set underneath the low of the range at E220.
Read the news as well as the charts
While technical analysis will provide the inspiration and structure for your trades, you should also do some light fundamental research before taking positions. Below is a quick checklist for you to work through before you trade. Ticking off each point will help to eliminate some simple mistakes and anticipate price movements better.
• Forthcoming dividend dates.
• Annual meeting dates.
• Recommendations of analysts/Investors Chronicle.
• Any scheduled launches.
• Dates of any quarterly reporting updates.
• Competitor announcements in any of the areas above.
It may take some extra legwork to research the above information for a few of the company's sector peers, but the results are often worthwhile. There are good correlations between share prices in some sectors, including supermarkets, high-street retailers and housebuilders. Poor performance from one firm can forewarn us of negative developments in other shares in the same sector.
Official retail sales figures will also serve as an indicator. Look at Chart 2 (below). Sainsbury and Tesco will all feel any reduced spending by the consumer. The airline sector will be affected by the price of oil. The reporting of airline seats sold can indicate the health of holiday and travel companies. Here you are looking for any information that may give you an edge in betting on another stock in the sector. Of course anomalies do occur, so this needs to be factored into the analysis.
Chart 2
Understand the big picture and betting in different types of markets
Trend indicators work best in strongly trending markets. If you are using a trend-based indicator to generate buy and sell signals, you must discipline yourself to not trade when the market begins to trade in a range. You will make more money by sitting on your hands.
The tricky part of this is deciding what phase of the market we are in right now. Was the last move down a change in trend or just a retracement? Look for key support and resistance levels to hold for the trend to remain intact. In addition, superior traders keep a close eye on the macroeconomic fundamentals that are supporting trends.
Keep it simple, though. Simplicity pays dividends. Look at chart 3 of Morrison. It shows a trend-following strategy using moving-average crossovers to generate buy and sell signals. The green line is the 10-period moving average and the red one the 20-period moving average.
Chart 3
This crossover system will break down and give many false signals when the market is in a consolidation phase. Each arrow represents a crossover where a bet can be placed. When the 20-period average crosses the 10-period average, you enter a long bet.
The market is trending up nicely, shown by the blue line which simply connects up the arrows on the chart whenever there is a crossover. This gives an obvious signal as to whether the current is trend, up, down or sideways.
The buy and sell signals become useless after the uptrend (point A) breaks down at point B. By point C, this indicator only generates false signals because the market is going sideways.
Trending indicators work best when the market is making new highs or lows as shown in chart 4 of Premier Foods Plc.
Compare the blue line on charts 3 and 4. Chart 4 makes betting look easy. And indeed betting can be a very simple affair if you have a well-executed simple system.
Chart 4
