What is Available?

14money3050913This article is intent to demonstrate to you what technical analysis is all about and how best you can deploy it to enhance your spread betting profitability. This objective will be achieved by introducing a couple of famous and well regarded technical indicators.


The Money Flow Index (MFI)

You could benefit greatly if you decide to integrate the many attributes of the Money Flow Index (MFI) into your spread betting trading strategies especially if you prefer using technical analysis to locate quality trading opportunities. This is because you can exploit the MFI to assist you in quantifying the sums of money flowing out of and into assets of interest.

You will discover that the MFI has many features that exhibit numerous similarities to those of the popular and well-known Relative Strength Index (RSI).  However, the RSI was invented to monitor volume whereas the MFI tracks price. Colin Twiggs developed the MFI by basing it on the concepts of an early technical indicator, invented by Marc Chaikin.

Twiggs advised that you should utilize the MFI to help you detect the births and terminations of trends. You will find that the MFI generates better quality statistics when you display it on trading charts using the daily time-frame and higher.  You are also recommended to verify all MFI findings by utilizing a second confirmatory technical indicator.


 If the MFI is beginning to bounce higher from its oversold level at 20, and starts tracking a rising price action, then this is a good indication that a new bull trend has been created. Similarly, you can identify good quality selling opportunities if the MFI drops below its overbought level at 80 and supports decreasing values in price.

For instance, you can observe in the above diagram that the MFI (blue line) detects a good entry point for a long spread. You must realize that to be able to utilize the MFI well that it signals overbought conditions for the currency pair when it produces readings of 80+, see above chart. Similarly, you must view values of 20- as oversold conditions.

For example, if you detect that the MFI has just climbed above its 20 level after recording oversold values then you should evaluate such a development as a strong buying opportunity for a long spread bet. Under such circumstances, you must continue to adopt caution because price could still plunge by hundreds of points. Consequently, you are recommended to always confirm all MFI readings by using a secondary technical indicator before opening a new spread bet.

The MFI generates its readings by multiplying volume by the average price and then ranging the resultant on a scale between one hundred and zero. If you detect that the MFI is starting to post falling readings but that price is still climbing then you should anticipate that a new market top is in the process of being created.


The On Balance Volume Indicator (OBV)

You can utilize the On Balance Volume indicator to help you to compare the price and volume flows of underlying assets for spread bets over a chosen time-period. Joseph Granville invented the On-Balance-Volume technical indicator in 1962 when he introduced it to the markets together with his OBV strategy in his revered hardback – ‘How to read the Stock Market’. Since then, the OBV indicator has acquired an impressive reputation by becoming one of the most reliable momentum tools available at evaluating the interactions between the price, volume and momentum of stocks, currencies and commodities.

Fundamentally, the OBV considers all of a trading day’s volume as up-volume if the price of an asset registers a closing value exceeding that of the previous day. Similarly, the OBV will classify a day’s volumes as down volume if price posts a closing value that is lower than that of its immediate predecessor. Consequently, the OBV main line represents the collective total of all these negative and positive volume flows.

You can observe all these features in the following diagram. Very importantly, the OBV may be predicting an imminent price retracement when its values begin to change course.  In fact, Granville first identified this important attribute of his invention after performing extensive research. You can observe this aspect of the OBV in the next diagram when the OBV starts to fall announcing the end of the present bull trend.


If you notice that the OBV values are climbing then you should also be able to verify that price has commenced climbing as well. In addition, you can utilize the OBV to assist you in detecting new price trends. For example, if the OBV starts to produce a sequence of higher highs and lows, then you should view such a development as a good quality buy signal for a long spread bet. Alternatively, if the OBV begins posting a series of lower lows and highs, then you should regard this pattern as a very serious sign to open a short spread bet.

You can also identify new quality trading opportunities developing if the OBV commences to generate values that diverge from price. This is because the design of the OBV focuses on the trends of assets. Granville advised that when volume starts to decrease during a bull trend, then a market top may be forming as buying pressure has begun to fade.

If you observe such a development then you should deduce that price will not continue to climb for much longer and that you should expect a retraction very soon. Granville also verified that a similar action occurs in bear trends if you notice that volumes are beginning to increase.

In addition, he also recommended utilizing a twenty-period moving average in conjunction with the OBV in order to help detect when trends are about to terminate.  You can detect such developments more easily by identifying when the moving average and the OBV line crossover. You should understand that the OBV is evaluated by traders to be one of the simplest and most popular momentum indicators available

Reversals could also be imminent when you observe any price and OBV divergences. If you also discover that the OBV is altering direction after it has been following price for some time, then you should regard this development as a potential opportunity to activate a new spread bet.


Average True Range Indicator

J. Welles Wilder designed his Average True Range (ATR) as a volatility indicator and introduced it to the trading markets in 1978. The ATR uses volatility levels and daily price movements to generate readings indicating how bullish traders are at buying assets. The ATR achieves this task by calculating the average true price range over a selected period of time.

The true range is determined by utilizing the difference between the daily high and open; the largest difference between the daily high and low and the difference between the daily low and open. Consequently, the ATR generates values representing the moving average of true range.

As such, when the ATR posts high values that it is warning that a major price reversal could be imminent because of high volume levels. In contrast, low readings imply price flat-lining with low trading volumes. In addition, when the Average True Range posts low readings then it has identified conditions suitable for range trading whilst high ones indicate that price has achieved a top or bottom. You are also recommended to use this indicator with a fourteen period on charting charts displaying the daily time-frame or higher.

You can utilize the ATR to help you detect breakouts which are associated with its high values.  You will also find that the higher value are produced as a result of panic buying or selling which results in price achieving tops or bottoms. Alternatively, you will discover that the lower readings strongly indicate that price has entered a consolidation period. However, you should not use the ATR to detect overbought or oversold conditions because Wilder did not include these conditions into the design of the ATR.

You should also not attempt to detect new trading opportunities with the ATR because this is not its primary function. Instead, you must realize the when the ATR is posting its highest readings it is very proficient at identifying market tops and bottoms. This is a very important attribute because you will then have an advance warning that price is about to undergo a major reversal in its current direction. In addition, you can utilize the ATR to help you cope better with volatile trading times because it has been specifically design to deal with these conditions.


Volume Rate of Change Indicator

This indicator is an oscillator that has many similarities to the Rate of Change Indicator but it focuses on volume instead of price. Consequently, you will find that the V-ROC produces readings that reflect volume changes. Many experts claim that because price reversals are usually partnered by significant rises in trading volumes that this is a useful parameter to track.

You will discover that you can use the V-ROC is assist you in detecting new bull and bear trading trends. The V-ROC creates readings that oscillate about a zero line and generates high values with increasing levels of trading volume and lower ones when volumes drop. The readings produced by the V-ROC are determined by dividing the volume movement over a selected time period by its value recorded when the period started.

As such, if you notice that the V-ROC is generating negative values then you should be able to verify that the trading volume is diminishing. In contrast, positive readings are indicative of rising volumes. Consequently, you can utilize the V-ROC to help you detect market bottoms, market tops, overbought conditions, oversold conditions and breakouts. This is because rapid changes in volume usually accompanied these major trading developments. You are also recommended to obtain secondary verification of the all V-ROC recommendations by utilizing other technical indicators.

You will find that one of the most difficult problems that you will encounter when you use the V-ROC is to select its optimum time-period. For instance, you could discover that the V-ROC becomes too sensitive if you choose a period that is too small.  Alternatively, the V-ROC could react too slowly to be able to accurately monitor major price developments, such as reversals, if the period is too high. Most experts recommend that the optimum selection is the 25 to 30 day period and that you should use this technical indicator on trading charts utilizing the daily time frame or higher.

The V-ROC can advise you about the imminent development of events such as the following. If you notice that the V-ROC values are oscillating about its zero level but price is still climbing then you should regard such a development as an indication that a price reversal may occur soon.

Leave a Reply