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At Safety in the Market we believe that history repeats. So it makes sense to know what your market has done in the past. David Bowden called this getting to know your market “like a cow knows its calf”. Whether you are specialising in a market or looking to take a one-off swing trade in a new market, it will help you plan your trade if you know how that market has behaved before.
On 25 August I will be conducting a one-day Trading the Banking Sector webinar and this will include a 90-minute session dedicated to explaining the critically important methods you can use to back-test your markets. You will also receive a purpose-designed template spread-sheet. Whether you are planning to join me or not, the aim of this article is to assist your trading by getting you to look at what your market has been doing.
I have written about back-testing ABCs in previous Trading Tutor articles and I suggest you go back through the archives to review these - you might consider this your homework. This exercise is to get you thinking about what else you might like to back-test. To start, think about the bigger picture and some of the patterns that you like to trade.
I have used bank stock to illustrate the process but this can be applied to anything you trade, be it stocks, commodities or even currencies. My favourite setup is a double top or double bottom on a 50% level, so I have chosen a market and reviewed the entire history of the price chart looking for double tops and double bottom setups. This is best done on the weekly chart. Take note of the setups and where they are on the current range or as a percentage of the current high. I have illustrated this in Chart 1 with a double top that is sitting at 87.5% of a bigger range and in Chart 2 that is sitting at a 50% level. Chart 1: CBA with Double Top at 87.5%
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CBA with Double Top at a 50% Level
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The second step is to take note of how far this double top/bottom pattern ran by measuring milestones reached on the repeat of the range from the first top/bottom to the middle, as illustrated this in Charts 3 and 4. Chart 3: CBA with Double Top Repeating to 150%
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Chart 4: CBA with Double Top Repeating past 200%
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Following this process for the entire history of the market might take you an hour but the value of that time will be well worth the effort.
Keep a record of your findings to refer to in the future. If you’d like to share them, I will post them on the SITM Discussion Forum. There are many other areas that are also worth back-testing, particularly if you are about to start concentrating on one or two markets. Join me on August 25th and we will cover these in detail and also learn how to put the information into a Trading Plan.
It’s the Journey
Lauren Jones
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