FuturesTechs Blog

Technical Analysis is an essential tool if you are going to trade using CFDs or Spread Betting.

The vast majority of professional day traders use technical analysis in some way shape or form during their trading day. They are aware what the important technical levels are for the markets that they trade. some do this work themselves, some rely upon services like FuturesTechs, knowing that we’ve got an 8 year track record of providing this information to the bulk of the UK Pro trading community.

Many newbies to trading struggle with how to “structure” a trade. Hopefully we’ll shed some light on this with today’s blog post.

It’s all about the levels, and that’s what we do here at FuturesTechs each day: We look at the levels that the market may be looking at, where things may change, where the buyers may return after a sell-off, where the sellers may wake up if the market starts to rise. These are commonly known as support and resistance.

Support is the name given to downside levels; prices below here the buyers may have returned previously, or where they may return today. If we fail to hold support levels the bears are obviously dominating; not giving the buyers the chance to defend these key price levels.

Resistance is the name given to price levels above the market where there may be some”action”. Either we’re going to get to these levels and fall over, or the market should see a strong reaction if we break above them.

These levels are quite often something as simple as old highs and lows, however old they are. We have found markets reacting to levels from over 20 years ago. The market has a long memory, and with charts readily available to all and sundry there’s no excuse not to be armed with the important lines in the sand as you head into each trading day.

The best traders in the world react to a bunch of different things to put on their trades: They wait patiently for a piece of news to come out, or for a technical level to break or hold, or for the market to do a certain thing that they’ve been expecting. They wait patiently. Lots of money can be lost doing trades for the sake of it. Boredom or the need to be involved is a dangerous emotion that a trader has to deal with.

There is little point in trading in between technical levels. The levels are created because they are the prices where things changed previously. They are the “action areas”. Why mess around trying to put trades on in “no mans land”? If you want to buy the market, chose a support level and put your buy order at or above there.

If you need somewhere to put a stop order you can again use a technical level.

Here’s an example: We were bearish of the Eurostoxx 50 Futures today despite Friday’s gains. We had a bold resistance level at 2704. Our bold levels are the important ones. So if we’re bearish and the market rallies to a bold resistance we would suggest selling before the level with a stop above it. The high this morning was 2698….

If you had sold at 2690 with a stop ay 2710 (or our next resistance level at 2728, if you want to give it a bit more “breathing space”) you would have got short and never been far offside.

On the same report we have bold supports at 2640 (the overnight gap) then right down at 2467 and 2418.

So this is the bit that isn’t “harry hindsdight”, just in case you want to jump on the idea that I’m writing this after the event: I will look to cover the short trade at 2470, but if we hold 2640 today I would just get out and cover the trade for either a small profit or at worse nothing. I think we need to break 2640 today to give this trade credibility. In other words we are using another bold level (this time a support) to add weight to our trade. If we don’t break below 2640 then maybe the bears aren’t ready to push us lower just now.

IT’S ALL ABOUT THE LEVELS.

So If you’re just starting out trading, whether it be with a Spread bet account, or CFD’s, or DMA (Direct market access) I would urge you to make technical analysis part of your daily process, AND TO TRADE THE LEVELS.

Be Careful!

I think i did a reasonable job of explaining it on CNBC this morning (you tell me!!) so instead of babbling on too much here I’ll post the link:

http://www.cnbc.com/id/15840232?video=820121614

To summarise I said that 850 is a MASSIVE support level, and that the weakness to here is a buying opportunity, although if 850 breaks you don’t want to be long, and a “stop and reverse” (see below) strategy might be advisable.

We get “proper” confirmation of a bounce happening if resistance levels like 872.6 and 900 are retaken.

In Brent Crude Oil I mooted the idea that we might be due a bounce some time soon as we’re getting close to some important supports.

And in the Bund Futures I talked about a Double Bottom formation which gave us a buy signal last week.

I steered clear of talking about Equity markets because the short term outlook is a tad confusing, and we haven’t had the best of time calling these of late, if the truth be known.

“Stop and Reverse” is where you have a position and you get out of it with a stop order, but at the same time you do the same trade to create an opposite position.

For example say you were long five lots of Gold at 870 with a stop order at 845, that means you want to get out and take the loss on your trade if the market goes down as far as 845. A stop order is defined as a market order that’s triggered if your loss reaches a certain level or price. You should always have a stop order on any trade that you put on, and technical levels can be the best way of deciding where to place these orders.

Many people place their stop orders below important support levels (like 850 in Gold) and sometimes, if you think the move below this key level is going to trigger a wave of selling, you may want to initiate a short position at the same time. If you put in an order to sell 10 lots at 845, to continue using our example, you would take the loss on your 5 lot long, then create a 5 lot short position at 845. If the market then went to 775, as we expect, you will offset the 25 point loss on the original buy order with a 70 point gain on the short trade.

Have a good week.

Cheers,

Clive.