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This article comes about through a conversation with a student who was saying that there weren’t any trades available on ASX stocks once he had added into his scanning all the possible factors that would help filter out riskier trade setups.
A consequence of this is that if you aren’t in the market, you can’t make any profits. This raises several essential points that all traders need to confront if they are going to reap the fruits of their labours:-
- You do not have to be in the market at all times. There may be rapid profits if you can be in the right place at the right time in a highly volatile market but there is no certificate of courage awarded if you make a donation to the market by being in the wrong place at the wrong time. As David Bowden said, “It is better to be out of the market wishing you were in than being in the market wishing you were out”!
- Losses are an inescapable part of trading. The psychologists may tell us to learn to love our losses but I’m happy to settle for accepting losses in the same way that I accept that there is a period of darkness that’s part and parcel of every 24 hour day – you can’t have one without the other but you want them in an acceptable proportion.
- Lastly, the responsibility lies with the trader to listen to what the market is telling us and to make provisions in our trading plan to respect these factors even if it means regular reviews of the best strategy.
Let’s take a look at the statement that “there aren’t any trades available” and the fine line that can separate winning and losing by taking an example of recent market activity in BHP.
The stock has been in a downtrend since May so I am looking only at short ABC Hi-Lites with an entry limit of 33% due to BHP’s tendency to gap.
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Using the pressure point tool it is a simple matter to evaluate each ABC setup and I chose to use the Stock Style stop management system but with entry up to 33% (to allow for BHP’s nature) and exit at 75%. This gave the following results:-
| Trade No |
Entry Limit |
Exit Method |
Outcome |
| 1 |
33% |
75% Exit Target |
Profit |
| 2 |
25% |
Stop Loss hit |
Loss |
| 3 |
33% |
75% Exit Target |
Profit |
| 4 |
33% |
Stop Loss hit |
Loss |
| 5 |
25% |
Entry + Commission Stop hit |
Breakeven |
If you then take the worst case financially and assume that every entry was at the limit which means that profits are minimized and losses maximized this series of 5 trades makes a small profit before paying commissions.
The point of this exercise is to show that even with no filters applied to our trade selection, the Swing Chart and our Stop Management Rules kept us safe.
Closer examination of trades 4 and 5 show that price fell only a few percent short of triggering the next milestone which would have taken one trade to breakeven and the other into profit, with a substantial increase in our overall profitability.
The opportunity that I want our students to embrace is to realize that these tools are a great starting point for tackling many markets but the student needs to take ownership of the tools and filters in order to optimise the results for each market.
Looking at the 1-Day swing chart of the above section of market serves to reinforce that this was not an easy-trending period so imagine the potential if we can develop our skills in this market and be ready to trade less volatile times ahead.
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Learn To Win,
Alard Russell
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