Identifying Trading Opportunities

You may find it a little strange that I have left it so long to talk about identifying trading opportunities. Don’t most trading and investment books make a big thing about telling you which stocks or other financial instruments to buy, and when? Well, I’ve left it until now for a very good reason. When trading or investing in general and particularly when spread betting, it is vitally important that you understand the tools of the trade, the tricks of the trade, and in particular the importance of risk management before you start splashing the cash.

On the face of it spread betting might have some benefits for the average investor. The average investor loses around 6% a year in three ways: costs, survivorship bias and poor skill. Spread betting gets around the key parts of that 6% by largely removing the cost element e.g. trading commissions, stamp duty, large bid/offer spreads, taxes and account charges. As spread betting is normally short term trading, it does not suffer from survivorship bias either. However the billion dollar question is: what is the average skill of a spread bettor?

A recent Cass Business School report shows that only 20% of futures traders manage to beat the market. That is a pretty low statistic and I would guess that amateur spread betters do much worse on average. I don’t see how you can be more successful than the (failing) professional futures traders over a period of time despite your savings on the costs.

While obviously I am aware of the many technical and fundamental techniques for identifying trading opportunities, my aim here is not to replicate the entire existing technical analysis and value investing literature. Rather, my intention is to share some of the opportunity identification strategies that I have found personally to be useful.