When is an ABC Trade not an ABC Trade?

On the face of it, 155 points, is an attractive Reference Range in anyone’s language. But there is a catch. One of the keys to successful trading is to set yourself up to take high probability opportunities. While the Reference Range for this trade looked extremely attractive in theoretical dollar terms, the likelihood of the market repeating this range was extremely low. I’d go as far as saying zero. Chart 1 shows the details for this trade and the end result.

I have looked back over the chart for the past few years and can see about two or three swings per year of this magnitude in terms of price. When looking at the statistic for the trades associated with a swing of around this size the success rate is just over 50%. Swings of this size are to be considered out of the ordinary. The biggest difference that I uncovered between this swing and those similar in size over the past couple of years was the number of days in the run up. Those more familiar with study of time would be aware that, not only can a Reference Range be measured in terms of price, but also time. There has been no single swing over the past four years that ran up for 12 straight bars without a lower bottom. One of the rules for ABC trading is to be wary of ranges that are abnormal and therefore unlikely to repeat. This range was clearly in the overbought basket. I let this trade go on this basis. I never like to see any traders drop capital on a trade but for those who did take this trade, here is an opportunity to learn and grow.

Until next week......

Noel Campbell