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I would like to pick up from where I left off in Trading Tutors Newsletter Issue 317. There you will recall that we used what Gann called a geometric angle to identify why the ABC short trade on 10 July failed. Chart 1 below is a brief recapitulation of that position.
Chart 1 – ABC Short Trade
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You can see here the ABC Short trade which failed because Point B fell on a strong support level, namely a 2 x 1 angle from the October 2008 low. These angles or lines are nothing to be confused about. They are analogous to a simple trend-line. The difference is that a trend-line usually joins two lows and is then projected into the future. The angle by contrast moves at a fixed rate, in this case 2 cents per day, so it can be drawn as soon as the low is confirmed, without waiting for a second low.
Now let us assume that you had taken the ABC short trade and saw on 13 July that the market closed near its low for the day. You would of course be happy that you had been filled in your position and expecting the market to head lower the following day. Then the next morning you wake to discover that the US markets have risen strongly overnight, so you expect our market to be strong.
You assess your position and come across this angle. You see that yesterday’s close and low were right on the support line of this 2 x 1 angle. You realise that if you get stopped out of the trade today, the low of 13 July will actually become a higher swing bottom. See Chart 2 below.
Chart 2 – First Higher Swing Bottom
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Anyone who has studied David Bowden’s Number One Trading Plan will be familiar with Gann’s rule that the safest place to buy is the first higher swing bottom above a strong support level. This is what is confirmed by the up day on 14 July.
So if you were short in the market and did this analysis before the market opened, you would be justified in calling your broker and doubling your stop loss order. In other words, if you were short 1,000 CFDs, you would amend your stop loss order to say, ‘Buy 2,000 CFDs of STO on stop at 13.41.’ This would close out your short position and have you long 1,000 CFDs. And as you can see from Chart 2, this is exactly what would have happened.
How do you then manage this trade? You need to find a meaningful reference range for the trade, as the previous swing on the swing chart is far too small. What you can do here is look at the bar chart and see where the tops and bottoms are. On Chart 3 you can see that the previous up move was from the low on 14 May to the top on 10 June. You can then use the manual ABC Points tool on ProfitSource to project this range from the 9 July low. This will give you a profit target for the next move of 15.17.
Chart 3 – Projecting The Previous Range
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From this point the market ran up for a further 6 days to hit 15.16, 1 cent short of the 100% target. Note from Chart 4 that it also reached the 3 x 1 angle from the same low of October 2008. If you were planning to exit at 100% and saw it fail to reach it by 1 cent and then also hit the angle, and then close on its low for the day, you would place your stop just under the low of that day and be closed out of the trade next morning at 14.80. If you have studied Time in your trading you will also note the date of that top – 22 June.
Chart 4 – Profit Target For The Trade
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So you have turned a loss of 0.18 per CFD on the failed ABC short trade around with a profit of 1.39 per CFD by reversing your position and going long.
Knowledge is Power!
Tim Walker
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