|
In the last two articles, in Issues 350 and 352, we looked at the strength of the low in Santos on February 26. But it would not be of much use to us if we didn’t look at how you could trade the set up. So in this article we are going to look at one way you could follow a simple trading plan to profit from the work we have done.
For this exercise we will use the following rules:
1. Account size $20,000, with maximum risk of 10%.
2. All entry rules in the Safety in the Market Smarter Starter Pack and Number One Trading Plan.
3. Stops to be trailed below 1-day swing chart bottoms.
4. Each additional position to be half the previous trade size.
I am not going to revisit the work in the earlier articles. We are going to assume that we have established the reasons to enter the trade and are now looking for a signal. Gann’s rule in his mechanical trading courses was that, when you have a double bottom on a 50% level, you should buy at the market. We enter on February 26 using the Closers Rule.
Chart 1 – Trade Entry
click to enlarge
Gann’s rule would have you place stops below the 50% line, but due to the support of the 1 x 1 angle, we should be safe with our stop 1c below the low of the day. As this is a strong set up we are prepared to take our maximum risk of 10%, and will look to take each additional entry signal as it comes.
Chart 2 – First Higher Swing Bottom
click to enlarge
March 9 did offer an outside day, but it was not an Outside Continuation Day entry as per the rules. This was because it opened fairly high and traded somewhat lower before rallying. So our next signal was our first ABC long trade, which was signalled by the Inside Day on March 11.
Chart 3 – ABC Long Trade
click to enlarge
We are simply taking each additional entry signal to create a Pyramid on our trade. That is why each trade will be half the size of the previous one, to stop the position becoming top-heavy. Note also that we now have considerable profit locked in on the trade. The next trade is a 2-Day ABC Long Trade. If you analysed this trade on its own you might elect to let it go by, but in this case, when adding to an already very profitable position, you would be much more ready to take the signal.
Chart 4 – 2-Day ABC Long Trade
click to enlarge
Chart 5 – ABC Long Trade
click to enlarge
There were 2 other potential entry signals, an ABC long trade and a Breaking of Multiple Tops entry. There is not space here to go into the reasons why you wouldn’t take these trades, but they would not materially affect the results here.
Finally, on April 13, the 1-Day swing bottom was broken for the first time since we entered the trade. Stops would have been underneath the previous bottom, at $14.64, and thus we would exit the trade at this price on that day.
Chart 6 – Exiting the Trade
click to enlarge
What did we do here? We found a really good set up, and then we simply followed the rules! In a series of trades lasting 6 weeks, even after taking out Commissions and Interest on the CFD position, we have more than doubled our capital.
Knowledge is Power!
Tim Walker
|