Investor Jones

Spread Betting and Chartism

Have you seen the adverts where you can make £10,000 a week (through financial spread betting) with only an hour’s work and give up your day job. Trading strategies that can guarantee you £400 a day. Yes, yes we have all seen them. Do they work? No, these are get rich quick schemes that all of us dream off yet but rarely work. These elaborate courses teach you trading strategies that don’t need complex analysis. Just look at charts and once reach a certain level all you do is buy and sell. Easy as tying your shoe lace and no brains required. Even Bush could do it!

When I was young, naïve and inexperienced, I bought a course from Vince Stanzione for £400. This contained a strategy guide, DVD and his secret to making more money than you can dream off! The secret was using moving averages of 20 and 40 days. These lines give you signals when to buy and sell. He made it sound so easy and yes it looked easy too! He used past charts to show how it worked and proved the moving average strategy worked. The problem was that past charts used worked. But for future market movements, I found a lot of the time I entered trades the moving average signals didn’t work! The terms he and many other trading universities use are that 7 out of 10 trades will be losing ones and 3 will be winning. The three winning trades will make up for your 7 losses and make you a profit.

[Cough, Cough]! What a load of bullshit! Pardon my French!

Did you know that 90% of Spread Betters lose! The spread betting firms are making so much money that they don’t have enough Vans to take the bags of money to the banks. Why because there are traders selling their secrets (get rich quick schemes) to make you lose money! It wouldn’t surprise me at all if the spread betting companies are funding these ventures!

All these get rich quick schemes all have one thing in common and that is chartism. After vast trading experience with charting I have concluded that it doesn’t work! Ok you may win a few trades with this technique. And these winning trades may well get you hooked into believing that you can make more money! Does this sound familiar? What these trading firms are luring you into is gambling with your money instead of teaching you how to make well informed educated trades into consistently making a profit. As Richard Farleigh says in his book Taming the Lion – “Chartists are the Astrologers in the Market. They use a pseudo-science.” Not saying more on the topic.

News Based Trading

After reading many books, blogs and various articles. I have come to the conclusion fundamental analysis and news based trading will give you an advantage into the stock market. There are no real books that explain how to analyse news within the stock market. What I mean by news based trading is monitoring, final results, economic events & data, sales forecast. I have found a couple of books that have helped me look for which pieces of news to trade on these are If its raining in Brazil, Buy Starbucks by Peter Navarro and UK Traders Bible by Dominic Connolly – (Quality book with practical advise and examples. Cuts the crap and goes straight into honing your trading skills.).

So to test this theory I started to trade purely on news and market reaction to it. Some of the news has already been priced in however some news the market reacted to immediately. And its these bits of news you need to decipher and act quickly to profit on. Even though the market may have moved a lot, you can still scalp off a few extra points on top of it as long as you catch it early enough! I proceeded to set up my blackberry to receive newsfeeds straight from the Reuters/Financial Times website and acted on news that I felt which would rise/fall the individual stock price. One example of a trade I did was when Remy Cointreau issued a 15% drop in profits before the French Market opened, I set an order to open at 0.50p a point. Left it till mid-afternoon and took a nice £150 profit. The share prices dropped further I could have made more of a profit, but had my exit strategy set! As they say “Proof is in the pudding”, click here to see a few of my profitable News Trades (with links) along with IG Index Dealing tickets.

The trick is with News Trading is finding event worthy news that will cause a reaction to a share or sector. But also try to find out what the market expectation is too as this can sometimes throw a spanner in the works. For example if “Company A” makes a loss of 10%, that to us means that’s generally bad news and we would expect the stock prices to fall. But in reality “Company A’s” stock prices would to rise. And then I am left scratching my head thinking. Why? The stock price would rise because “Company A” had done better than Market Analysts had predicted of a 20% loss. Get the picture. Some news can create an instant reaction to an equity/stock, some news can take longer to penetrate the markets reaction. Therefore different types of News can impact different depths and layers within the Stock Market.

The Conclusion: Chartism vs New based trading

If traders and trading universities are trying to get you to trade purely on Charts then don’t listen to them, just remember get rich quick schemes don’t work (If its sounds too good to be true, it probably is! Famous saying but very true!). Quite simply you cant beat the stock market that easily. If you can I take my hat off to you (And expect a free ride on your very expensive yacht proving me wrong!). Majority of successful Stock Market traders have worked hard at analysing the Markets and finding financial instruments and tools into giving them a profit. In essence any trader telling stating you can make money purely of trading charts run the other way. Have tried & tested doesn’t work.

After much searching, I have found that news based trading works and works well. However the main problems I have faced with this type of trading is finding out what the market expectation is and having real time news from a Bloomberg terminal (cannot afford one of these just yet!). I am still exploring this topic and will be writing a follow up with further findings. Currently researching pairs trading with fundamental analysis and early indications show that this is certainly a great investment stratergy to use for our current economic climate.