|
There is an old saying that the Stock Market spends 80% of its time working out where to go and 20% of its time getting there. The times when the market is preparing for a move are usually known as periods of ‘accumulation’ or ‘distribution’, depending on whether the coming move is to be up or down respectively. These ‘beds of preparation’, as they are also known, are characterised by sideways price action.
There are ways of making money from sideways trending markets, and options trading strategies are best employed for this purpose. But as the purpose of this series of articles is to follow the ABC trading methodology on a single stock, namely Santos (STO:ASX) I will confine myself to those parameters.
Chart 1 – Santos Daily Bar Chart
click to enlarge
In this chart I have highlighted all the Long and Short ABC trades for the past 12 months. I have labelled all the ‘winning trades’. This shows that over this period there were 6 successful and 10 unsuccessful trades, for a total of 16. I have called a trade successful if it reaches a minimum of the 50% milestone, since depending on your trading strategy you can still make profits in such a situation. I always call such trades ‘winners’ as that is what I believe you must focus on, since what you see is what you get.
Now at first glance a ratio of 6:10 successful trades does not seem very attractive, so we need to see if there are some ways in which the unsuccessful trades could be avoided. Cutting the unsuccessful trades in half would make an immediate increase in profitability.
The other thing to notice from Chart 1 is that over the past year there have only been 2 periods when we should have been taking ABC trades – the aftermath of the all-time high, and the rally off the major low in October.
There is not the space in an article like this to go through a complete system of back testing, and in any case that is something that everyone needs to do individually, as the only trading system that will work for you is the one you have worked out for yourself. David Bowden has given you tools, and these are very powerful. Remember though, a circular saw is a powerful tool, but it is only likely to cut your hand off if you don’t learn how to use it properly.
But see how a simple tool in ProfitSource can make a difference. In the Smarter Starter Pack David suggests that you only take trades where the daily and weekly trends are in sympathy. We might expand that to allow us to take trades where the weekly trend is uncertain but not opposite to the daily trend.
To check this we can use the Weekly Trend Filter, found in the Hi-Lites menu. I like to use the Swing Overlay to see the Weekly Swing Chart over the Bar Chart as well. I have illustrated this in Chart 2. Black bars indicate that the weekly trend is uncertain; green bars that it is up; and red down – there are none of them!
Chart 2 – Weekly Trend Filter and Swing Overlay
click to enlarge
You can see that 3 unsuccessful ABC trades in early 2009 could be avoided by this simple rule. And the short trade in the October waterfall decline should never be taken, as there is very little chance of a repeat of such a range.
There is so much more to say here, and perhaps I shall return to this topic in future articles. However I would urge you to go back over your chosen market and analyse at least one year and preferably several (the more the better). Go through every ABC trade, even weekly and 2 and 3 day trades. See if you can identify the indications that your market gives you (every one is different) and come up with a strategy for which trades to take and which to avoid. Then you have a Trading Plan.
Knowledge is Power!
Tim Walker
|