Previously I’ve talked about breakouts, and how you can bet on them. You wait for whatever sign you accept as proof that the breakout is real, whether it’s a certain distance beyond the support or resistance or some other measure, then pile in to follow the yet-to-be established trend in the breakout direction.
I have to tell you, now we are considering intra-day strategies, that sometimes this plan does not work, and the breakout was only a fake, with the price coming back into the same range that it was already trading at. It all depends how far you let the breakout move go before deciding to bet on it. There’s nothing wrong with trading on breakouts in principle, it’s just that you must gauge for yourself what assurance you will accept that the breakout is good and you can trade it.
Breakouts are fine for the short term better, but for intra-day we are looking to make very rapid bets. So it is sometimes more interesting to bet against the short term crowd if you think that they could be wrong. The fact that many traders may think that a breakout is happening, and jump on to it, means that you have a lot of interest and hence the probability of rapid large swings. This strategy looks for fake breakouts, and bets against the crowd.
If you want to do this, then you must put the odds on your side. Look for indications that any breakout is unlikely. These would include that the breakout goes against the overall trend which still looks strong. Areas of powerful support or resistance, preferably long-term levels, at the breakout also suggest that would be a tough job for the price to really breakout and it may be a fake.
Betting against a breakout does not mean that we can’t also consider that the breakout is real. This is just where conditional orders are useful. If you see a breakout, say down through a support level, you can place two potential bets, with only one expected to be filled. The up bet would be triggered if the price came back up through the support that had been breeched, and this is the expected outcome if you feel that the breakout was fake. A down bet set further out on the breakout would provide profit if the breakout held and the price continued downward. If one of the bets is triggered, then the other will automatically become a stop loss should the move reverse, at least until you can get back to your computer and adjust the position to a closer level.
Does this sound too good to be true? You profit if the price goes down, or you profit if the price goes up? That’s true, but there is also the chance that the price goes nowhere, and you lose your spread. What you are identifying by looking for the breakout, fake or otherwise, is an area where you expect there to be a lot of trading interest and therefore the potential for the price to move.
Betting on Blow Offs
The blow off is a term beloved of Americans, and is descriptive of a certain type of rare market performance. It’s when everyone who is invested in something suddenly decides that they need to get out of it. You sometimes see this in the gold market for instance, when the price of gold has risen on the basis that no-one has any confidence in fiat currency any more. This leads to irrational highs. Often as a result of some news, suddenly everyone who can wants out, and there is a massive sell-off, leading to a massive loss in price.
You can observe the effect of this on the price. Usually what happens is that after the price plummets, everyone who had any doubt and wanted out has already sold, so there are no ready sellers left any more. And the effect of that is . . . ? Yes, the price goes back up a little, which looks like a bounce on the chart.
If you are betting intra-day, this small movement in a predictably short time can be a good bet. The blow off usually takes only a day, and after that you can place an up bet to take advantage of the bounce. Your protective stop loss would be just below the initial blow off level, and you would use a tight trailing stop on the bounce, as you expect it to fail in due course.
Betting on Company Results
I talk about trading the news in the next section, but that is sometimes a longer term strategy than intraday betting, so here I’m going to consider specifically trading on the results announcements of companies.
When you are betting, you want to bet on something that is going to have some action, and move the price. With the right strategy, you to some extent don’t even care which way the price moves, you just want action. Company results and announcements can provide that sort of action.
The great thing about company results is that you know when you are going to get them, and can be prepared. This doesn’t apply so much with other company announcements, so you may need to “wing it” a little more with those. But any decent investors’ news will give you a list of the companies that are declaring their results on any particular week, and you can arrange to be glued to your computer screen at the right times.
A lot has been written about what you can expect share prices to do when companies report their results. There is a school of thought which says that it does not matter whether the company does well or badly, the price is affected mostly by what the market expectations were. It’s possible to see this in action sometimes, when you can see a great company result makes share prices go down, because the market thought it would do better, or a company issues lower forecasts in advance of the formal announcement, so that poor results do not have a bad effect on the shares.
When you are trading or financial spread betting, your focus has to be not on what you might expect the prices to do from a rational standpoint, but on what they actually do. The markets tell you what their reactions are, you do not tell them. The key point with betting on company results announcements is that you do not care whether the results are going to be good or bad, so do not worry trying to anticipate them – the market will still do what it wants. The important point is that the stock prices can be expected to move, up or down, in reaction.
Sometimes a stock will start off going in one direction, only to retrace and go in the other direction as the market “absorbs” the news. This is a factor that you need to keep in mind when you enter a bet, and as you ride the bet, keeping your stop losses as close as necessary. When the announcement is made, you should watch the first half-hour or so to get a taste of the market sentiment, then think about getting in before the daily traders get home and jump on the trade. If it’s looking good, this is one type of bet where you may want to hang on overnight to watch for more profits, but beware the gap open and make sure that you can see continued enthusiasm from the markets that suggests the move will keep on going.