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When I first studied my Smarter Starter Pack, I thought that the way to trade was to find a market and take every ABC long and short trade. After all, that is the way the exercises are constructed. However, when I did some back-testing, I could see that there were unsuccessful ABC trades that I should be able to avoid if I knew what to look for.
Later, when I attended my first Interactive Trading Workshop, I learned to evaluate trades based on all the criteria I had studied. I diligently followed the market day by day and found that on virtually every day there was at least one ABC trade that would go to 100%. So I thought that I should be looking to take trades every day.
As time went on and my studies progressed to the Ultimate Gann Course and the Master Forecasting Course, I came to realise that there are times when I shouldn’t be trading at all. These are the times when the market is making no clear trend. Conversely, there are other times when I definitely would want to be trading. I found that David had been saying all along that the market spends 80% of its time making up its mind where to go and 20% of the time getting there.
I also learned that ABCs have more uses than giving me a trade; they are also helping me to rate the strength or weakness of the market. Let us apply some of this understanding to our usual stock, Santos (STO:ASX). Our work with resistance cards helped us call the high in June 2008. Then followed a period of distribution over the ensuing month. Gann describes this as the time when large investors sell out of their stocks, which then pass from strong hands to weak ones.
The market sold off slightly more than 50% of the run up from the January 2008 double bottom, although it never closed below that level on the weekly chart. If we count the calendar days of the run up and the run down, the pull-back in time was exactly 50%. All this is summarised in Chart 1.
Chart 1 – First Sell-Off in Santos
Chart 1
click to enlarge
From this point the market made a double top, which was effectively a first and second lower top after the all-time high in June. In How To Make Profits in Commodities Gann says that the safest place to sell is the first lower top, so to get a double top here is even safer. And you can see what a beautiful illustration of the rule this was, as the market literally fell over a precipice. This was, incidentally, after the ban on short selling was imposed, so we couldn’t have traded it. But would you have been thinking about taking the ABC long trade that showed up on 30th September?
But we can use the ABCs for confirmation here. That ABC long trade failed even to reach 50%, confirming that the market was heading down off the double top. After the fall in early October, there was an ABC short trade on the 14th, which also failed to reach 50%. The AB range was too large to take the trade, but the failure to reach 50% is a sign of reversal.
Why did the market make a low on 17th October? Because in 2007 it made a double top on the 9th and 19th October, followed by a significant reversal. David’s rule is to always watch the anniversary of a major top or bottom for an important turn.
Chart 2 – Using ABCs to Rate the Strength of the Market
Chart 2
click to enlarge
This all shows the importance of looking at the bigger picture in the market. Having an idea of the major indicators for turns tells us when to keep out of trades, which sometimes is just as important as knowing when to trade.
Knowledge is Power!
Tim Walker
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