WHILE the FTSE All Share Index ended higher in 21 out of the last 29 years, trading the FTSE 100 or FTSE All Share can be ruthless. This is because of the intra-year swings these markets exhibit. But by knowing about these swings, you could use them to your advantage.
With the markets tending to spend most of their time in a bullish trend, it makes sense to focus on gains in bullish years and corresponding intra-year declines. In a bullish year, the FTSE All Share tends to rise about 15 per cent. The index is already up 7.8 per cent this year, so there is scope for further rises, especially if you anticipate ample ECB QE to come, a stronger world economy, and limited rate hikes by the Fed.
Second, a pullback tends to be 11.78 per cent, and this is despite the index closing higher in these years. So the risk in a normal bullish year is almost as high as the potential return. However, if we actively trade the markets, we can use these dips to our benefit. If we expect the longer-term trend to remain bullish, a dip of about 11.78 per cent, combined with traditional technical analysis and common sense, could be turned into a buying opportunity.
If we anticipate a bearish year, the data looks different. First, it only happens 27.5 per cent of the time, so aligning our expectations accordingly is vital. Second, the intra-year swing tends to be 26 per cent, while the actual decline by the end of the year will be about 17 per cent. Bearish traders therefore tend to give up some gains. In other words, if you want to short or are already short, if we start to approach a decline of 26 per cent from the yearly high, then it’s probably a good idea to book gains.
Alejandro Zambrano is a currency strategy analyst at DailyFX.com.