The Power of Moving Averages

3average020913This article is intended to demonstrate how you can exploit the power of moving averages to boost your profitability from spread betting. To achieve this task you first need to construct a strategy that will assist you in detecting the best entry and exit points for all your new spread bets. Many traders deploy technical indicators as their main means in order to satisfy this objective. You can find extensive lists of such tools by performing an appropriate internet search. However, you must understand that many technical indicators need to be merged into a complete spread betting strategy in order to achieve best results.

 

About the Simple Moving Average

How to perform this task proficiently will now be demonstrated by using the power of the simple moving average to execute spread bets based on gold. The simple moving average (SMA) is a technical indicator that presents values which are determined by adding the closing values of the last N time periods and then dividing the resultant by the number of N periods. You must appreciate that the SMA is a lagging indicator that you can deploy to forecast future directional movements of price using the historical price data of an asset.

The following gold chart shows the simple moving averages SMA50 (50-period) and SMA100 (100-period) in action in the top half of the picture. Below, you can also see the Relative Strength Index (RSI) which will be used as a secondary source of validation.

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 The Main Features of the Strategy

You can gain a good appreciation and understanding of activating spread bets based on gold by recording the following key parameters of this asset:

1. The economic developments affecting gold.

2. The key technical support, resistance and pivot points.

3. Important events of the technical indicators.

4. The daily movement range of gold.

5. Price alerts informing you about new spread bets.

Next, you need to select the time-frame that will comply best with your trading style. If you are a beginner, then you are recommended to only consider using time-frames from the daily upwards because the associated quality of their statistics is of a higher standard than those of their shorter counterparts.

The main feature of this spread betting strategy is that it is designed to trade in the prevailing direction of the current trend. Specifically, long spread bets will be only executed during bullish trends while short spread bets will be activated when bearish trends dominate. In particular, bets will be ideally opened at the birth of a new trend and then will remain active until they terminate in order to maximize profits. These concepts sound great in principle but how exactly can they be accomplished?

This is where the power of moving averages enters the scene as they will be utilized to identify the birth and death of trends. For example, a new bullish trend will be detected when the faster moving SMA50 crosses above the slower-moving SMA100. This trend will then exist until the SMA50 drops back beneath the SMA100 flagging the start of a new bearish trend. Consequently, successive SMA crossovers will announce the birth of successive new trends oscillating between bullish and bearish. You will find that such crossovers are most reliable and accurate if you display the SMAs on trading charts using the longer time-frames from the daily upwards.

For example, envisage that you have just detected the SMA50 climbing assertively above the SMA100. After checking that the RSI is not posting an overbought status by registering a value above 70, you should now activate a new long spread bet using gold as its underlying asset. You should then maintain this bet active in order to maximize your profits until you observe the SMA50 dropping back beneath the SMA100. From studying this example, you can now begin to appreciate the value and power of the simple moving average.

You will also need to acquire a very good grasp of money management concepts when implementing this strategy because this skill is paramount to your success. If you are a novice, then you should utilize a simple fixed strategy recommending that you must never risk more than 2% of your total equity on any one spread bet. If you can learn how to apply this policy well, then it will aid you in controlling and minimizing your risk exposure by maximizing the protection of your account balance when opening spread bets based on gold.

You should also learn how to calculate the win-to-loss ratio and expectancy value of your gold spread betting strategy and consider this activity as a central component of your system. After you have calculated these parameters for your original designs, you can then compare them to the values produced by all your future modifications and updates. You can calculate the expectancy value of your spread betting strategy by using the following formula:

Expectancy value = (%Win X Avg_Win) – (%Loss X Avg_Loss)

% Win = %spread bets that are winners

% Loss = %spread bets that are losers

Avg_Win = average win size

Avg_Loss = average loss size

Win-to-Loss Ratio = (number of wins)/ (number of Losses)

All types of trading are unpredictable and even sure-fire deals can turn surprisingly bad in a matter of moments. This is especially so when you are attempting to trade gold on the spread betting market because of the volatile trading conditions that this asset can generate. The following diagram demonstrates the levels of turbulence that you are expect to encounter when opening spread bets based on gold.

2average020913 By studying the above chart, you can confirm that gold rose in value by almost a gigantic 16,600 pips in just six trading days recently. In comparison, other assets could only manage compatible climbs of about ten times less than this. You can now understand why so many traders are attracted to trading gold on the spread betting markets because of its high potential for significant profits. However, you must exert caution because there are also serious downside risks involved. This is why you must have in position a well-tested risk and money management strategy whenever you attempt to implement spread bets structured on gold.

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