FOREX

The much maligned "Short Seller" profits from other people's misery and is not a popular face in times of fear and uncertainty. The past year have seen the terms "shorting" and "short selling" come into the public domain but no one feels sorry for the Short Seller in bull markets.

One of the stocks which were high on the wish-list of the short-sellers were Bradford & Bingley (BB-). The stock peaked in April 2006, but the real short-signal came in June 2007, when B&B began to trend lower. Remember once you see a series of lower highs and lower lows, you have a downtrend in place.

You can use different tools when you asses a stocks trend. One such tool is the moving average (MA), which is simply the average price over a specified period of time. On the chart, which is taken from our Spread Betting trading platform, you will be able to see a menu which allows you to specify your moving average settings. This is also available on our CFD platform.

We have chosen to have two moving average price lines on the chart, this is because if a trend is reversing, the shorter moving average will give you a signal before the longer moving average does.

We have used a 20-day MA, and will wait for it to cross over the 50-day MA for a signal. All this can easily be set on the spread betting platform at Interactive Investor. We are waiting to see the market to be making lower highs and lower lows before short a stock using a 20-50 period MA crossover method.

The method is simple, and works great in trending markets. You can also use it on shorter time frames when you trade the markets intra-day. One downside with the MA crossover method is that it performs poorly in a market with no trend or direction, also known as a range bound market.
"Once a trend sets into motion, it tends to stay in motion"

Translated this means that the odds of the trend continuing are higher than of it reversing. However, many traders like to trade reversals, if they can spot one. One of the tools that can be used for trading a reversal is a trendline.

A trendline is a line drawn on a chart which to the greatest possible extent captures the trend in the market. It draws a line above or below the market, by connecting two points on the chart. The theory behind trendlines is that as long as the trendline remains intact, it pays off to continue to buy the small countertrends.

Once the trendline is broken, it is time to get onto the new emerging trend. At least this is the theory behind it, but it is of course not always as straight forward. You can use trendlines to trade currencies. Currencies have an amazing disposition to trend. If you trade them on a 4-hour chart it cuts away the noise of intra-day trading. Noise is another word for short-term volatility. By using a longer time frame you are able to capture the true underlying trend.

So what are the pros and cons of trading a trendline on a longer-term chart? One of the advantages is that the signals are reliable due to the length of the chart time frame. It is important to remember that there has to be congruency in your expectations of the trade.

There is little point in expecting that a trendline break on a 5-min chart will set up a longer-term swing trade lasting days or weeks. If you don't want to be tied to the screen all the time, a good compromise is a longer-term chart offers me, it is still speculation but over days rather than minutes.

One disadvantage you have to take into account is your stop-loss. You need to place a stop-loss when you enter a position. As you are trading over a longer time frame, you could place a larger stop-loss. The reason is that you don't want your stop-order to be caught by the random noise in the market.

You only want to be stopped out if the trend reversal does not materialise. This means that a stop can be as much as 75-100 points or "pips" as it is called in the currency market. You can compensate for the large stop-loss by trading a smaller size.

On our trading platforms it is easy to place trend lines. The trendline break indicated that the Sterling Dollar rate would decline. And although the move took some time to materialise it was a good trending move.

Use our CFD and Spread Betting trading platforms or CFD simulator and Spread Betting simulator to access TA charting tools.