School Corner
When trading, irrespective whether this is through the mechanisms of spreadbetting, CFD trading or outright physical instruments, there are only 2 primary investing styles that investors will use either technical or fundamental analysis. The most appropriate style for you will depend upon a number of factors including: your personal time availability, understanding of accounting and personal mathematical capability, level of economics appreciation, intended timescale of the trade etc, etc… Generally, it seems most traders, particularly those looking to make quick-fire short term trades and certainly those with a bias towards commodities and currencies (the ultimate trending markets), will focus upon technical analysis and in many instances use this method almost exclusively for their trading. The attraction of technical analysis is that once you understand some relatively simple terms, and how the indicators are made up, that you can quickly form an opinion on the instrument you are looking at and so, at face value, technical analysis is potentially more suited to those traders with less time to allocate to their trading. Fundamental analysis tends to be the favoured option of ‘investors’ as opposed to traders. With this approach an individual looks to analyse the economic backdrop affecting that particular instrument and, in the case of shares, delving into the accounts to calculate ratios such as Price Earnings, dividend yields, price to cash flow, book value (balance sheet worth) etc, and a whole variety of other measures. Usefully, there are a number of companies that provide this type of research for the fundamentally orientated but time poor investor. One company whom we recommend, and is also a contributor to our magazine, is FatProphets — they cover a whole host of companies and markets and their research pieces are written by CFA’s (a serious and respected charter of analytical ability) — take a look at their feature this month on Bskyb in assessing the calibre of their work.
18 | www.financial-spread-betting.com | June 2012
As mentioned above, if you are day or ‘swing’ trading then you will almost exclusively use technical analysis, certainly in relation to indices, currencies and commodities. You are trying to look for the optimum set of indicators that tip the scales in your favour. Vice versa, if, for example, you feel that Japanese stocks are undervalued and fancy taking a long bet on the Nikkei, then you would probably look at measures of fundamental value and attempt to ‘time’ your way into the market through technical analysis. You can see that for the more medium - long term trades then the bias of analysis is towards fundamentals, with technicals used to optimise your trade entry level. Short terms trades like FTSE day trades are almost exclusively based upon using technical indicators in guiding you with your entries and exits, and this is why many spreadbetting & CFD firms now include charting packages on their platforms. One of our contributors, Phil Seaton of LS Trader, uses technicals exclusively, even for medium - longer term trades, and this is all based on trend following - he in fact argues that an awareness of the fundamentals affecting a particular instrument is not required and that all that matters is the ‘trend’ and being on the right side of this. You can see that there are therefore 2 extremes of this approach and whatever works for you, you should stick with.
Technical analysis basics Let’s look at some of the most used technical analysis measures and terms, and attempt to understand how they are calculated and finally look at some current example of these: (i) RSI (Relative Strength Indicator) - Developed by one of the Grandaddy’s of technical analysis - J Welles Wilder this is a measure of a particular instrument’s strength or weakness based on its closing prices over a recent trading period — generally 14 days. It is, at its heart, a momentum oscillator and is deemed to be overbought when the measure is over 70 and oversold when the measure is below 30.