How to profit from a 'split trade'

In spread betting, a 'split trade' gives a trader the opportunity to benefit from a move larger than the one originally targeted. Here's a good example.

In a previous post, I described a trade where I bet £2 on an outcome. I had a price target in mind, but wasn't sure if the market would carry on straight past it. I didn't want to give up on a big profit if the market decided to exceed my initial profit-taking point.

So here was my plan take the profit on the first £1 bet at my first target and let the other £1 ride. Meanwhile I would move my protective stop first to break-even, and then successively closer to the market. This is what I call a 'split trade'. It gives me the opportunity to benefit from a move larger than the one I had originally targeted.

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Here is a good recent example using the EUR/USD currency pair.

During November, the euro was aggressively sold, mainly on worries over sovereign debt and the possible break-up of the eurozone. There was speculation that the weaker nations, such as Ireland, Portugal, Italy, Spain, and Greece would float off on their own, with the stronger northern nations staying in.

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The decline from the 5 November 1.42 high to the 30 November 1.30 low was in a clear Elliott wave pattern of three waves down. Also, at the 1.30 low, there was a clear positive divergence with momentum. This is always a signal to me to watch out for a snap-back rally.

Also, at the end of November, sentiment was very much bearish on the euro. I have always remembered an old market maxim: "The market exists to surprise the majority". In this case, the majority were very definitely short the euro.

The snap-back rally duly took place took the market to just shy of the Fibonacci 38.2% retrace of the November decline. That was the first wave in an expected A-B-C rally.

SB00030-01

The market then dropped back to a Fibonacci 50% retrace of the move from the 30 November low to the wave A top.

I find these multiple corrective waves usually reverse right on a Fibonacci retracement level.

It is well worth running your Fibonacci tool over your charts as a matter of course and that goes for even the shortest time-frame charts.

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An Elliott wave A-B-C pattern forms

The market then rallied into a new high above wave A and I was on the lookout for a possible top in a wave C. On 14 December, the market surged to a spike high but on lower momentum than it had at Wave A a possible negative divergence with momentum.

I decided to do a split trade right there and set my stop 35 pips away using my 3% rule.

14 Dec sold £2 rolling EUR/USD @ 1.3480 Stop @ 1.3515 Risk £70 (1.4% of account)

Why was I looking for a top to wave C in the 1.35 area? Simply because that was right on the Fibonacci 38.2% retrace of the big move from the 5 November 1.4285 high and the 30 November 1.2970 low! I told you the Fibonacci tool on your spread-betting platform would be very valuable!

So the 1.35 area represented a good candidate for a top because:

A big negative divergence with momentum was present A clear Elliott wave 3-wave pattern from the 30 November low (corrective) A major Fibonacci retrace level was reached

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As it turned out, that was indeed the top and the market fell back.

My first target was the Fibonacci retrace of wave C at 1.3370. I therefore entered a resting buy order there for the first £1 bet: as the market fell, I lowered my stop to break-even, following my break-even rule.

I was filled later that day:

14 Dec bought £1 rolling EUR/USD @ 1.3370 Profit 110 pips, £110

My free ride

I now had a free ride with the remaining £1 bet. If the market rallied back to my entry price, I would suffer no loss on that trade, and had to be content with the £110 profit on the first bet.

But the target for that was the next Fibonacci level (38.2%) at 1.3295, where I set my buy order, and was filled the very next day:

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15 Dec bought £1 rolling EUR/USD @ 1.3295 Profit 185 pips £185 Total profit £295

From that point on, I was out of the market and content with my day trades.

I was then on the lookout for another promising situation, but felt that the market would need to do some consolidation for a few days before making its next move.

Of course, it is a lot more work short-term trading like this, rather than longer-term trading. If you were a position trader, you would seek to establish a position and sit on it, and stay with it until your stops are triggered.

A position trader would look for extremes, such as we saw at wave C, get short, use a wide stop, and just sit on this position. All the while they would be moving protective stops using a trailing stop method.

It's really horses for courses.

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