Shorting the FTSE 100 when high then buying when low

alext2784

Hi all, I currently have a FTSE 100 ETF which I bought when the FTSE was about 5700 so I'm currently up about 5.5%. Since the markets are constantly going up and down, I have been thinking about selling this ETF when its up and buying a short FTSE 100 ETF. Then when its low enough selling the short ETF and re-buying the old one. Do people think this is a viable strategy and does anyone have any experience doing something similar? I'm currently using a haliax trading account which costs me around £11 for each sale.

I'm pretty new to all this so any advice would be much appreciated.

Thanks!

Aegis

It's pretty much what short term traders make a living doing. However, bear in mind that:you will need a system to tell you when to buy and sell. There's no point in watching the market drop 100 points from a local high, deciding that it's a downward trend and shorting the index only to see it rise 200 points before you can exit your position, after all. You therefore need to work on the following issues:

• How to determine whether a movement is likely to be a short term small correction or the start of a longer-term trend
• How to confirm your thoughts and therefore find an entry point
• How to limit your losses: what sort of stop-loss you would look to use and how you would work out where to set it
• How to take gains: either identifying a trend reversal in its early stages or simply pre-determining the level of gain you wish to take. Alternatively this could utilise a trailing stop loss, but what level of offset would you choose?

With all of the above you would also need to account for the spread and the commission costs. If your system generates a large number of buy/sell signals, you will end up spending a lot of money on dealing costs, which will eat into your profits. On the other hand if your system generates fewer signals you are more likely to miss out on part of market movements that generate your profit in the first place.

All in all, pattern recognition trading is a difficult game to get into, and I would strongly suggest you don't simply enter into it blindly because you think that a certain pattern is likely to continue: you need to work out a way of determining that likelihood without bringing your emotions into the equation.

DavidHayton

With hindsight this is an easy way to riches.

Without hindsight it is a different kettle of fish altogether. Thanks Aegis for a comprehensive account!

David

nrsql

It is very easy to devise a method that will usually make you small gains. i.e. decide which way the market will move and close when you've made a small profit. Problem is that this will work under normal conditions then somethin odd will happen and the same method will cause large losses and (if you are lucky) wipe out most of the gains. The art is to prevent this downside rather than to spot the gains.

Have you looked at spread betting - it allows what you are considering easily but make sure you understand the leverage.

rockitup

Personally I think spread betting on Indices for a beginner is not advisable but nrsql makes a good point regarding that OP should understand the leverage risks of spread betting.

One method to limit risks with this is weekly binaries, which can be entered at any time the spread better chooses

IG Index do weekly binaries on FTSE and other indices, so with this OP can limit his risks to losing or winning a pre-determined number of points.

Also if he thinks the bet is going the wrong way (or is satisfied with points made at that time) he can exit the trade to realise the loss/profit.

A staking plan is really needed with spread betting to avoid getting his bank wiped out though, nearly happened to me once a few years ago

cing0

alext2784 wrote: »

Do people think this is a viable strategy and does anyone have any experience doing something similar? I'm currently using a haliax trading account which costs me around £11 for each sale.

I'm pretty new to all this so any advice would be much appreciated.

Thanks!

Yes.
I've used XUKS to do this. There's a 0.25% spread so you end up paying effectively the 0.5% stamp duty. One thing to watch out for is that there is some sort of tracking error (don't know the technical term) where over the time, the price of the unit does not match repeatable values of the FTSE 100 index. Solution, don't hold onto it for too long.