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Last month I argued that a trader should look for opportunities in any markets that are making strong trends. This may have come as a shock to those who have read David’s comment about getting to know a market like a cow knows her calf. Shouldn’t I study one (or a few) markets extensively and only trade those? While there is nothing wrong with this, I would like to offer an alternative approach to David’s dictum.
What if, instead of knowing one market intimately, you learned to master a particular style of trade? If you became proficient in a set-up that has a high probability of success and learned to identify all the nuances of that set-up, you would give yourself a plan of attack for a variety of markets and plenty of trading opportunities.
Let me give you an example of just one possibility. In Chapter 2 of the Commodities Course, W.D. Gann states that “pyramids should be started after double or triple bottoms”. In that chapter, Rule 2 says to buy against double or triple bottoms and Rule 3 says to sell against double or triple tops. David discussed double tops and bottoms in the Smarter Starter Pack, Number One Trading Plan and the Master Forecasting Course and said that he could make good money just trading these, in combination with Time by Degrees. Perhaps we should listen to him!
A search through the stock and commodity markets for 2011 will uncover enough successful set-ups of this genre to fill a year of trading, and then some.
For simplicity, I will refer only to double bottoms in the following analysis but the same principles apply to double and triple tops and bottoms. Let’s consider the situation of a double bottom where the second bottom goes slightly below the first low and then reverses:
Chart 1 – Double Bottom in Gold
click chart to enlarge
The lows on 26 September and 29 December are 94-days or degrees apart - ‘close enough for government work’, as the saying goes. Note that the second bottom went $11 lower intra-day but then reversed and closed above the September low.
So what is the significance of breaking the first low and closing above it? Think about this for a moment. Putting aside short-term traders like us, large position holders will place their stops under important prior lows. So there would have been plenty of stop loss orders under the 26 September bottom that would have been triggered when the price went below that level on 29 December.
These sell orders should have driven prices lower but Gold finished the day higher. This means there must have been sufficient buying power to absorb all those sell orders, and more. This tells us that big traders were buying at that level. And we want to follow the big traders because they make the market.
Identifying a strong set-up is not enough; you also need to know how you are going to trade it. One method you could use is to wait for the first higher swing bottom, which is often the safest place to enter. The problem with this approach is illustrated in Chart 2 on the mini-S&P 500 contract.
Chart 2 – Double Bottom on the S&P 500
click chart to enlarge
By the time the first higher swing bottom trade presented on 18 October, the S&P had rallied 60-points from the low of the 4th. Further, Point B on the 17th had made a double top with the 17 August high. You would have been right to be worried about taking this trade, and indeed it only made it as far as the 50% milestone.
So what can you do? One solution would be to simply place an entry stop one point above the high of the low day, especially when you have a good signal day such as occurred on 4 October. (I have left intra-day entries out of the picture because they tend to look much better in retrospect than they do at the time).
There is much more to this set-up than I can cover here but we will be analysing this type of formation and many other trading opportunities on stock and commodity markets in Australia and the U.S. during our 10-week Advanced Trader Coaching programme commencing on 22 March. I hope you can join me.
This is a great time to be in the markets. Don’t miss out!
Knowledge is Power!
Tim Walker
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