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There are times in the market when you feel like you are in a threshing machine and you have no idea which way is up. And there are other times when you get on a good trend and all you need to do is stay there. These last couple of months in Santos (STO:ASX) have been in the second category. It is good to remember these times, because they come and go, but when they are here, they reward persistence and hard work.
In Issue 355 we followed a simple trading plan and saw how we could have doubled our capital in a series of trades which, if you look at a weekly chart, did not encompass a very large move in this stock. In Issue 357, again simple rules were followed, and allowed us not only to get out at the top of the run up, but also to catch the start of the next run down.
The difference between the 2 trades was that in the first we were starting with a capital of $20,000, but in the second we had the $24,362.50 profit (less commission and interest). So assume you took the short trade in Issue 357. Entry was at $14.72 and Stop Loss Order at $14.94, giving a risk per CFD of $0.22. You would have been able to take 20,000 CFDs on this trade instead of the 10,000 on the first Long trade.
How did the trade go?
Chart 1 – Progress of the Short Trade
click to enlarge
As in the previous series of trades, I have trailed stops above Swing Tops, as David Bowden teaches in the Number One Trading Plan. You could use the milestone strategies from the Smarter Starter Pack, or even a combination strategy such as the 3 Contracts System, covered in the Interactive Trading Workshop.
Unlike the series of Long trades, there were not many opportunities to add to your position in this Short trade. There was one ABC short trade, which unfortunately opened outside the Entry Limit. There are ways in which you could pyramid, but they are outside the scope of this article.
But even with the one short position, we made a profit of $1.95 per CFD, which translates to a $39,000 profit, this time in less than a month. Think about this. If you started on 26 February with $20,000, by 12 May your capital had grown to $80,000.
Now, we have been stopped out today (12 May), which incidentally confirms a first higher swing bottom after the 7 May low. Would you consider going long on this signal? Consider the following chart.
Chart 2 – Position of the Market
click to enlarge
See how the market has broken the 1 x 1 trading day angle from the October 2008 bear market low. This is a sign of weakness. It also broke the triple bottoms and the 50% level we were previously using as support. It has since reversed but has not yet regained the angle. This is a point at which I would be cautious about going long, especially after a great run of profitable trades. On the fourth time at the same level, the market usually goes through.
As Gann would say, it is time to ‘let the market tell its story.’
Knowledge is Power,
Tim Walker
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