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We left off our discussion in Issue 355 with the market stopping us out of our Long position in Santos (STO:ASX) on 13 April. I mentioned very briefly that there were reasons why the market was indicating that it wasn’t going to go higher. If you have been following this series it will come as no surprise to you that the major reason was a 50% level of a range.
Chart 1 – 50% of the Range
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Gann said that you can beat the market with the 50% rule alone, and hopefully you are starting to see why. Also note the old top from 2007 around the same level, and the time period in months from the dates I have marked. In fact, after Santos made several weekly tops on this 50% level, Gann’s rule would be to go short straight away. But we are not going to be so bold. As in the previous discussion, we are going to use the rules. We have already doubled our account with conservative trading in 6 weeks. The biggest danger in this situation is that it can go to your head, and you then proceed to donate a greater or lesser proportion of your profits back to the market. So this is a time to be conservative and let the market give you a definite signal.
Chart 2 – Short Entry Signal
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An entry signal duly arrived on 15 April with an Outside Day. Normally you have to wait until after an Outside Day, but if you look at the Open and Close of the day, you can anticipate that this day is going to give you a First Lower Swing Top. This is an advanced entry signal from the Number One Trading Plan, and you should spend some time making sure you understand it. You would enter as the low of the previous (inside) day was broken, with stops above the high of the outside day.
Chart 3 – Progress of the Trade
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You can see from Chart 3, the advantage of entering a trade early in the move. There was an ABC short trade signalled on 21 April, but the next day the market gapped down past the 33% entry limit. There are still ways you can enter a trade like this, using the Openers Rule, but as you can see it was difficult in this case. The market rallied after the Open, which is not the sort of signal you want to see. Our advanced entry on 15 April is now well in profit, and as this article is being written on 28 April, the stop loss order would be above the swing top of the 27 April. Remember there is more than one way of managing stop loss orders. In both this article and our previous article, I have used swing tops and bottoms to trail stops, as David Bowden teaches in the Number One Trading Plan. You could use the milestone strategies from the Smarter Starter Pack, and you could also combine the two strategies together.
Knowledge is Power!
Tim Walker
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