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This newsletter goes to a wide readership, and traders of all levels of ability follow these articles. I aim to write information that will suit people at these different levels. If you find some that are beyond where your studies have reached at this time, file them away and come back to them later. You may be surprised what you discover.
We left off our story in Issue 359 with Santos (STO:ASX) breaking a triple bottom on the fourth attempt. We were stopped out of our short position, but I suggested that it was a time to be cautious before going long. There were both price and time reasons for this. What did the market do next?
Chart 1 – Angles as Support and Resistance
click to enlarge
You would already be familiar with the concept that bottoms which have been support can, when broken, act as resistance. This chart illustrates how the same thing happens with Gann’s geometric angles. After the low on 7 May, the market exactly touched the angle on 14 May.
How could you trade this? Gann’s rule, taken from his lesson on angles in the Commodities Course, would be to sell the moment the market hit the angle and fell away. He suggests a stop-loss 1-3 cents above the angle. Perhaps you could use 1/3 of the Average Range, which would be approximately 9 cents.
Let’s say you were more conservative. At the end of the day, when you saw the bar, you could place an order to go short the next day, with an entry stop below the day’s low.
Chart 2 – Short Trade
click to enlarge
This would see your trade filled on the Open the next day at 12.95. In this case your stop would go 1c above the swing top at 13.29. Your risk is 13.29 – 12.95 = 0.34 per CFD. If you are following our account balance over these recent trades, our original $20,000 has now ballooned to over $80,000. You could easily take 20,000 CFDs in this trade, and with a bit of imagination you can see how a much tighter entry was possible, allowing an even larger position.
The next day was an outside day, but did not give an Outside Continuation Day trade. This was because of the low Open price. Nevertheless, it did confirm a lower top and you could have added to your position on 19 May at 12.65. You would have taken another 10,000 CFDs and placed all stops above the lower swing top.
I have mentioned before, Gann’s rule that when a market breaks one angle it will fall to the next. On 21 May the market opened below the 1 x 2 angle, which was also right on the mid-point of the total trading range of the history of this stock. You could have used the Openers Rule to exit the position, say, at 11.40. This would have added $43,500, less commission to your account.
Knowledge is Power!
Tim Walker
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