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Firstly I would like to express my thanks to all the readers who have given me feedback on these articles on Santos (STO:ASX). Some have gone so far as to send me their own analysis, and it is great to see that you are picking up on things that I haven’t covered, and sometimes even things I hadn’t noticed!
When I began this current run of trades in late February, my aim was to show how having a relatively simple trading plan can bring excellent profits. If you look back to Issue 355 you will see a broad outline of that plan. I would urge you to flesh this out in more detail. If you own the Commodities Course, read Chapter 2, which gives Gann’s mechanical trading system.
Last week I left you with a question, whether you would be prepared to take an ABC long trade at a potential resistance level. There was no right or wrong answer to that question. It would depend on how you worded your trading plan. Let’s quickly refresh that set up.
Chart 1 – ABC Long Trade
click to enlarge
The advantage we had was that we took our initial long position on 21st May. We then took an additional half-position on 27th May, so that by the time this ABC trade came along, our position size was down to a quarter of the original. Let’s assume the worst-case scenario, that you took this trade. Entry was achieved on 16 June at 13.59. On 18 June there was a higher swing bottom, so stops on all trades would be moved up to 13.37. On 22 June the stop was hit. Results are as follows:
| Position 1 |
50,000 CFDs |
Entry at 11.40 |
Exit at 13.37 |
Profit $98,500 |
| Position 2 |
25,000 CFDs |
Entry at 12.11 |
Exit at 13.37 |
Profit $31,500 |
| Position 3 |
12,500 CFDs |
Entry at 13.59 |
Exit at 13.37 |
Loss $2,750 |
Total profit $127,250 less commission and interest.
As you can see the final trade had a negligible effect on the end result. And yet again we have doubled our account in this series of trades, bringing the total account balance to around $250,000. This is over a 1,000% return on our capital in 4 months of trading!
Gann’s mechanical system involved reversing positions from long to short or vice versa whenever the stop was hit. I prefer to wait for an entry signal. Did we get a signal to go short? Let’s check the big picture again.
Chart 2 – Short Trade Set-Up
click to enlarge
The 50% level of the range from the yearly low of 2007 to the monthly lower top of 2008 that started the waterfall decline provided resistance that the market couldn’t overcome for the whole of last week. Notice how many other times this level has acted as support and resistance (circled on the chart). This run was also a repeat of our previous run from 26th February to 12th April. Now take a look at the weekly chart.
Chart 3 – ABC Weekly Short Trade
click to enlarge
On the week ending 18th June there was an ABC short trade showing. The high of Point C was taken out on Monday 21st June, but only just, and the resistance levels in Chart 2 were not decisively broken. Therefore, when the market reversed on 22nd June and stopped out our long position, we could have opened a short position when the low of the previous week was broken, that is, at 13.31. From now on we will keep our opening position at 50,000 CFDs.
Knowledge is Power!
Tim Walker
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