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When we keep hearing how volatile the market is, it is tempting to think that it will always be hard to find a good trade. David Bowden makes the point more than once that there is a time to be in the market and a time when it is better to be standing on the sidelines, waiting for the market to tell its story. Let’s look at a time when it was great to be in the market and consider how we might have made the most of it.
We will again look at Santos (STO:ASX). Hopefully those of you who are following this series of articles are beginning to build up a picture of this stock. You can also pick a stock that you like to trade and do the same sort of work with it. You will get to know a market and, as your knowledge increases, you will understand better how to trade it. Every time you learn a new technique, apply it to your favourite market. After all, who gets paid more – the GP, or the Specialist?
Chart 1 – The move from August to October 2007
click chart for more detail
The objective here is to analyse the movements in Santos from the low of 16th August 2007. The market had a strong run down from the high of 20th July. The 16th of August was a big day on the ASX, as many of you will remember. It would have taken a degree of confidence with the sentiment in the market at that time to think about taking long trades. But here is where analysing the charts and ignoring the news will see you taking advantage of market moves.
Chart 2 – Overbalance of Price
click chart for more detail
Using the Swing Overlay and Swing Tops and Bottoms hi-lite in ProfitSource, we can look for indications of a change of trend. After the top of 20th July, the market fell. As it fell, it had a rally of 0.36, then a second rally of 0.60, and then after 16th August, a rally of 1.45. This is more than twice the size of the previous rallies, and was an indication that the trend was changing after 16th August. For those students who own David Bowden’s Number One Trading Plan, have a look whether you could have traded that Overbalance of Price. (The short answer is you couldn’t, but have a look at why).
Now I will ask you to revise the Additional Contracts rule, given in the instructions for the Euro-Dollar currency trading exercise in the Smarter Starter Pack. This rule enables us to take advantage of a strong trend by adding to our position after the market crosses Point B. What is a strong trend? A strong trend is an ABC trade where Point C retraces less than 50% of the range from A to B.
Looking at the four trades in Chart 1, trades 1, 3 and 4 all had retracements less than 50%. So in each of those trades, we could have added one-half of the original number of CFDs we had in the trade on the day Point B was broken. As David spells out in the instructions, Point B needs to be broken by more than 1 point – probably about 10 cents would be a reasonable amount. So in Trade 1 we would have entered the trade on 30th August and taken an additional position on 31st August. You will have to work out how you would manage your stops. For those keen to improve their trading and profitability, go through each of these trades and see what stop management strategy would have given you the best results and how much money you could have made trading one good run in one stock over a period of two months.
Knowledge is power!
Tim Walker
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