One of the keys to successful spread betting is to recognise familiar patterns in index prices. If you can identify a pattern, you can often make an accurate guess as to where the price will go next, allowing you to trade in the right direction. An advantage of this is that many other people are looking for the same patterns, so if you know what to look for, you can predict where the price is going and have that movement backed up by a significant volume of trades.
One of the basic patterns to look for is the ‘head and shoulders’. The head and shoulders is formed by a peak, then a higher peak, and then a lower peak, hence the name. The movement will climb up into the first shoulder, and fall away after the second shoulder. In between the head and the shoulders there will be troughs (bear in mind that this movement also exists in trough format, depending on the trend of the markets).
The head and shoulders are formed by buyers taking control of the market and pushing the price up. At the peak of the first shoulder, the price has reached a temporary limit, and will fall back as people decide whether it’s worth making the trade. At the bottom of that peak, traders decide it is worth it and there is enough volume to push the price higher, to the peak of the head.
At this level the market decides the price is too high and allows it to drop, but traders have another run at buying and form the second shoulder. After this sellers gain control, the market has proven it’s not strong enough to push the prices any higher and therefore the price falls.
Identifying the shape of a head and shoulders is easy after the event, but spotting it as it forms is the trick. The best time for a beginner to enter is as the market starts to fall off the second shoulder, as soon as it reaches the same level as the troughs between the head and the shoulders, you should trade for the market to fall.
The trick with spread betting is not to get too greedy, if you’re making a profit you have to strike the balance between riding it out, and not holding on too long. Generally speaking, with head and shoulders movements you should expect to gain as much as the difference between the trough either side of the head and the peak of the head itself. Keeping an eye on trading volumes will also help you spot the end of the trend.
Spread betting companies generally make a wide range of resources available to their traders (Tradefair for instance offer a complementary ‘Little Black Book’ filled with handy advice for those new to spread betting). If you’re just starting out, don’t be afraid to make the most of these resources as the more you learn, the quicker you’ll identify and make the most out of opportunities.
