Just thought I'd post this information as I have been caught by this situation several times and it might help others. It isn't a lesson on TA, just something to watch out for if you use TA with spreadbetting companies. These charts refer to Thursday 16th January 2003. They are for the Dow but there was a similar chart on the S&P (though it wasn't as clear which is why I used the Dow).
This has nothing to do with spreadbet 'bias' (please refer to this post if you wish to talk about that http://www.trade2win.co.uk/boards/showthread.php?s=&threadid=4516 ). It is just that when you trade the 'cash' on a spreadbet you are really trading the future. Futures are more volatile and move at different speeds to the cash index.
You can see from the chart below that the real Dow index (INDU) made a double top at 8805 then broke down through 8784 which was then a TA sell signal. It is usual in these situations for the index to try and get back to 8784 which has now become a resistance line. You can see that it failed to make this line and subsequently fell heavily (on Thursday and Friday). If you were trading this you would have put a stop above 8784 because a break up through this level would signal that the double top had failed. If you are the daring type you would also have shorted this failure.
Below we have the Deal4Free chart for the Dow Cash during the same period. (In theory every other spreadbet company should have exactly the same chart). Note that this is a chart of the Bid price which is why the numbers I have quoted are slightly different from the chart levels. You can see that the double top occurred at 8802 and the initial downwards break occurred at 8775. Again, they are different from the INDU because they are based on futures. The important thing (and what this post is all about) is that on the return it broke up through the resistance! In TA this break would be a signal to close your position.
Lessons are:
1. If you spreadbet then you should also have the 'real' cash index in front of you. Be aware that when trading SB ‘cash’ products you are really trading futures.
2. You need to adjust your money management to take this issue into account. In the situation described above the INDU failed at resistance. However, if it had kept going up the futures price (and hence the SBs Cash price) would have been even higher before you could get out.
3. You need to be very careful with stops and where you are placing them. I tend to use very tight stops which is why I get caught by situations like this. I am gradually moving to manually getting out of the market, though I wouldn’t recommend this to beginners – you should use auto stops.
This has nothing to do with spreadbet 'bias' (please refer to this post if you wish to talk about that http://www.trade2win.co.uk/boards/showthread.php?s=&threadid=4516 ). It is just that when you trade the 'cash' on a spreadbet you are really trading the future. Futures are more volatile and move at different speeds to the cash index.
You can see from the chart below that the real Dow index (INDU) made a double top at 8805 then broke down through 8784 which was then a TA sell signal. It is usual in these situations for the index to try and get back to 8784 which has now become a resistance line. You can see that it failed to make this line and subsequently fell heavily (on Thursday and Friday). If you were trading this you would have put a stop above 8784 because a break up through this level would signal that the double top had failed. If you are the daring type you would also have shorted this failure.
Below we have the Deal4Free chart for the Dow Cash during the same period. (In theory every other spreadbet company should have exactly the same chart). Note that this is a chart of the Bid price which is why the numbers I have quoted are slightly different from the chart levels. You can see that the double top occurred at 8802 and the initial downwards break occurred at 8775. Again, they are different from the INDU because they are based on futures. The important thing (and what this post is all about) is that on the return it broke up through the resistance! In TA this break would be a signal to close your position.
Lessons are:
1. If you spreadbet then you should also have the 'real' cash index in front of you. Be aware that when trading SB ‘cash’ products you are really trading futures.
2. You need to adjust your money management to take this issue into account. In the situation described above the INDU failed at resistance. However, if it had kept going up the futures price (and hence the SBs Cash price) would have been even higher before you could get out.
3. You need to be very careful with stops and where you are placing them. I tend to use very tight stops which is why I get caught by situations like this. I am gradually moving to manually getting out of the market, though I wouldn’t recommend this to beginners – you should use auto stops.
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