Using Moving Averages in Spread Betting

By mosesbet · Filed Under Brokers, Spread Betting Comments Off on Using Moving Averages in Spread Betting 

Moving Averages

The most common indicator used for spread betting on the financial markets is the single moving average (MA) or multiple moving averages.

The single moving average is a basic and objective way of determining the trend of stock or index.  The moving average is a non-weighted mean of the previous n data points in the series.  For example, if the data set is 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 then the single moving average would be (1+2+3+4+5+6+7+8+9+10)/10 = 5.5.  Generally we will use a 10 day up to 200 day MA

The single moving average is really useful for beginner spread bettors because it provides an easy way of predicting the movement of stock and deciding whether to go long or short and when to open and close different trading positions.

How to Use Moving Averages to Make a Profit

Generally speaking when the index of a stock or indices is above the MA than it shows it’s in an upward trend.  Since it looks as though the price is increasing we should be buying stock or going long.  This doesn’t mean we always have to go long when the stock crosses above the MA (for instance we could do a bit of scalp trading) but in general you should have a long attitude.

When the stock price drops below the MA then it shows that the stock is going to fall in price.  This the perfect time to close or sell your positions.  Alternatively, when the price falls below the MA line than you could make a profit by short-selling.  As you can tell both of these options for calculating the MA are very simple ways of predicting future stock movements and making money from spread betting.  Of course there is no guarantee that this method will work 100% of the time but in general this is one of the basic signals that you can use.

If you’re spread betting strategy depends on MAs than you shouldn’t be risking more than 1% of your total funds on each position.  The actually size and stake of your position is obviously difficult to calculate since you don’t know at what price the position will close, however I usually use the initial stop placement as a guide to help.  Also make sure that using this strategy you keep your eye on the markets 24/7 since you can’t really rely on a stop-loss for this type of trade.

How to Use Multiple Moving Averages

Another trading method is to use multiple moving averages to calculate when to open/close trades or when to go long or short with you stock.

Imagine we use two different multiple moving averages – a 10 day average and a 100 day average (many traders use 50 and 200 instead).  When the 10 day MA crosses above the longer 100 day MA (this is known as the golden cross) the trend is moving up and we should be buying.  Once the shorter 10 day MA crosses and falls below the longer 100 day MA (the death cross) than we should sell.

Again, the exact opposite is true for short-selling.  When the longer MA crosses above the shorter MA than now is a good time to be short-selling.

Moving Averages vs. Exponential Moving Averages

Exponential Moving Averages (EMAs) are very similar to Moving Averages (MAs) however they place more weighting on the most recent patterns of data.  This basically means that EMAs are more responsive to price patterns and movements (better for scalp traders) where as MAs provide a more reliable long term view of markets (which are better for day swing traders).

 

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