|
We left Santos (STO:ASX) with a signal to enter a short position, based on an ABC trade on the weekly chart. The original trade indication came on the week ending 18 June, as follows:
Chart 1 – ABC Weekly Short Trade
click to enlarge
Point C came in right on the 50% level of the range as indicated in Chart 1, and was a 62% retracement of the A-B range. On Monday 21 June the market pushed 2 cents above Point C, and the following day reversed and broke the low of the Point C week at 13.32. This constituted an Outside Reversal Week and was a signal to enter the trade.
The Split Screen view in Chart 2 allows you to see this with the daily and weekly charts for comparison.
Chart 2 – Outside Reversal Week
click to enlarge
The upshot of all this is that we have a new Point C, which means that the milestones for the trade need to be recalculated. We would go short 50,000 CFDs at 13.31 with stop loss order at 13.68, which is 1 cent above the high of the new Point C.
Note that I have maintained the size of the initial position at 50,000 CFDs. Theoretically our capital would allow us to trade a larger position. But bear in mind that the average daily volume of STO is around 4 million shares. 50,000 CFDs would be about as large a position as we would like to start a trade with, as we may pyramid more during the move and we don’t want to be oversized. So from now on the initial position will always be 50,000.
The next question that arises is how we should manage the trade. Until now we have been trading off the daily chart, but now we have used a signal from the weekly chart to enter a trade. If you are trading a stock and your trading rules allow for it, there is nothing wrong with taking a weekly ABC trade and managing it according to the ABC trading rules in the Smarter Starter Pack. In other words, you could use the milestones of the trade on the weekly chart to move stops according to the Stock, Currency or Index strategies.
However, another option would be to manage the trade according to the same rules that we have been using since the start of this campaign in February. If you look back to Issue 355, where I gave you the trading rules we would operate under, they included all the entry strategies in the Smarter Starter Pack and Number One Trading Plan.
So for this trade I will manage it on the daily chart, using the 1-day swing chart for stop loss orders and for additional trade signals. You can see from Chart 3 that an Outside Continuation Day on 24 June confirmed a first lower swing top. Thus we would take an additional 25,000 CFDs at 12.73, 1 cent below the low of the previous day.
Chart 3 – Trade Management
click to enlarge
Stops would be moved down above each 1-day swing top, and on 7 July we were stopped out of the trade at 12.63. This resulted in a profit on the initial position of 0.68 or $34,000. The additional position made 0.10 or $2,500. Even though this was not one of our bigger profits, it was still a return of about 15% on our trading capital, which is still great for 2 weeks’ trading.
For now we would be on the sidelines waiting for a new entry signal.
Knowledge is Power!
Tim Walker
|