Investment guru’s love investing clients money for the long term. Essentially it’s an educated guess that the value of the assets selected will increase long term. Warren Buffett, the legendary investment grandee, of Berkshire Hathaway fame (the investment company the Buffett controls) sings the praises about value investing. He’s said, “be greedy when other are fearful” and vice versa. Well it’s certainly worked for Buffet, but would this strategy work for spread betting traders? Probably not.
Not all investing grandees recommend value investing techniques. Three professors at the London Business School (LBS) have gone on record to say that that momentum investing is just as good or better than taking a value approach. This article expands on the professors’ conclusions and see if the same principles can be used for momentum spread trading strategies on financial markets. Comparison will be made to momentum investing and value investing.
Spread trading can not use the principle used by value investors because value trades or investments are done for the long term, whereas spread trades are normally for no longer than a few months. If a trader chooses a company to trade based on a value based approach it could be years before an entry into the trade can be made. That’s because value based stock selection involves getting a company that has been undervalued by the market. Based on the idea that markets are irrational and that sometimes good companies get missed by the markets. The trouble is these undervalued stocks can take years for the share prices to increase. Markets can also be said to be irrational because bad stocks can perform very well. This can happen if the share is in ‘vogue’ or it is in a sector that is popular with fund managers.
Spread trading relies on predictable movements in the price of a company’s shares. Momentum makes this much easier and in the words of the Economist “the momentum affect is huge”. Especially if there is massive stimulus from outside sources such as the Federal Reserve of the USA operating a very loose monetary policy. The case for a momentum spread betting strategy is strong.
The trend is your friend. As the saying goes.
Company shares tend to benefit from the crowd effect. Traders and investors jumping on a “bandwagon” make prices trend either either up or down. Many fund managers tend to feel obliged to back trends for quick profits. This short term performance is what can be profitable for momenetum spread traders.
It’s not just company shares that benefit. Various studies have shown that currency and commodity market prices can trend either up or down for long periods. Trends can take between months to years to come to a conclusion.
Why do momentum strategies suit spread betting?
Compared to traditional investing spread betting costs a lot less. Spread betting avoids payment of stamp duty, commissions and the bid offer spread. Spread trading profits are also free from taxes. This is a big benefit.
What are the risks with momentum spread trading?
Timing is one of the most important aspects of successful momentum spread trading. To follow the heard at the wrong time can be very damaging to capital. Successful momentum trading involves good share selection, using tried and tested rules for choosing when to enter and exit trades.
How does momentum spread trading work in practice?
First it is necessary to choose company shares that are suitable for momentum spread trading. Choosing when to enter and exit trades is made much easier by using a combination of free spread trading tools.
Any active spread trader can reduce their trading costs significantly by choosing a spread betting company that has tight spreads.