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Have you ever had the experience of back-testing a period of the market that you were watching and/or trading and wondered how you missed all the excellent trading opportunities that were there? There are a number of reasons why this happens.
The simple practical reason is that many markets nowadays trade the best part of 24-hours a day. And depending on where in the world you live relative to the markets you are trading, it may be impossible or at least impractical to watch the markets at the time you want to make a trade. Even if you live in, say, Sydney trading ASX stocks, or in New York trading US stocks, life has a habit of landing an important issue on your doorstep on the very day your market is making that important move you have been stalking for the last three weeks. You return to your computer that night to find that it has done exactly what you expected and made a huge move without you and it is too late to get on board. Sound familiar?
Let’s take a look at the Silver market. I have chosen this market to illustrate my point for several reasons. One is that it recently made a readily identifiable setup that I know many people were following. Another is that, as a commodity market, it trades nearly 24-hours in the day. You may think this would not be a problem for US traders, as the big moves usually happen during the US day session. But this is often not the case. Some of the big moves in Silver recently have occurred during the Australian day session.
Here’s the setup I was talking about:
Chart 1 – Silver Triple Bottom
click chart to enlarge
I have written about this bottom at length in other articles, so I won’t go over it again here, but you can see from the weekly chart that following the formation of the triple bottom, there was a period of accumulation during July and August. If you were watching this, you would have been waiting for the breakout to occur, as this would be your signal to buy. (You would have also been waiting for the breakout, in case it went down instead of up, in which case you would have gone short on the breaking of the triple bottom.)
Let’s look at the daily chart to determine the exact entry point:
Chart 2 – Breakout from Accumulation
click chart to enlarge
Study this chart carefully and you will see a few things to look for in the future. Even without a swing chart, you can see that after the 28 June low (the triple bottom), each new low was at a higher level, indicating support for higher prices. Secondly, note the three highs of 3 July, 31 July and 10 August. Gann’s rule is that the market usually breaks through on the fourth time at the same level.
Finally, note that I have marked Time by Degrees from the 16 May low. Why did I do this, since this was not the final low? If you compare this to the weekly chart in Chart 1, you will observe that the downward move from the 29 February high ran out of momentum at this low and the market entered a sideways phase. (90° from the start of this phase marked the end of it).
The combination of all of this information indicates an imminent move. So how do you prepare for this? The proper action would be to place on-stop orders in the market each day so that you were ready. Two bars before the Breakout would be the place to start. After seeing that bar, and knowing that Time and Pattern were coming together, you should place an order to buy on the breaking of either the 10 August high or, more conservatively, the 3 July high. As you can see from Chart 2, waiting for the close of the breakout day put you at a severe disadvantage in terms of risk. Even worse would be to wait for the next higher swing bottom after the breakout, as we can see from Chart 3:
Chart 3 – Next Higher Swing Bottom
click chart to enlarge
If you had been following the accumulation, you would not have been surprised at the breakout. Accumulation means ‘accumulation of energy’ and when energy is accumulated it creates force, which becomes momentum of price movement in the markets.
When the top was made on 27 August, you would naturally be watching for an ABC trade. But the first Point C was signalled the next day. Only one bar down after a rise like this might have you worried but your rules say you have to take the trade. Often, in cases like this, the next day produces a bad outside day and you take a loss. The retracement hasn’t completed yet. If that happens you just have to turn around and place a new order.
One way you could guard against this is to put your entry above Point B. This may not the conventional way of taking an ABC trade but it would still be with 25% of the A-B range and would mean that you would be unlikely to get filled unless the up move was genuinely resuming.
In any case, there was no problem in this instance. The following day was an inside day and you would again need to place an order somewhere. Fortunately the bar had a low close, indicating that another down day was likely. But don’t assume anything! Place your order in the market.
Point C duly came in on 30 August, which was exactly 60° from the 28 June low. You can see why you need to be disciplined in placing those orders. If you waited for a two-day ABC trade, you missed the boat.
The next two trading opportunities used another of the advanced entry strategies from the Number One Trading Plan – Outside Continuation Patterns. Chart 4 – Outside Continuation Trades
click chart to enlarge
The first of these occurred on 7 September and actually showed the advantage of trading commodities in the Australian and New Zealand time zones. The early electronic trading formed a down day, indicating that a Point B had formed on the previous bar. There was, however, no indication at this time that a powerful up move was about to take place.
This was trickier and shows the virtue of anticipation. You would know that an outside day would give you an entry signal, so you simply place the order in the market to enter on the break of the previous day’s high. You would probably expect that that order would not be filled. But when you wake up the next morning and find that you made money while you were sleeping, it would be a very pleasant surprise!
The next outside continuation pattern was more complicated and you might not take this trade. Nevertheless, you can see how it formed.
I have not talked about trade management at all here but those who have done my Cotton Webinar would be able to write the article for me, as you know exactly what I would say.
Now we want to know how long the movement will last. I tend to be wary of forecasting the ends of moves, as this can lead to abandoning a perfectly good with-the-trend position and assuming a losing position in the other direction. However, we can certainly consider the obvious:
Chart 5 – Potential Profit Target
click chart to enlarge
Strictly speaking, 90° from the 28 June low gives us Saturday, 29 September. Thus we have to pick either Friday, 28 September or Monday, 1 October. The market is working its way towards the last important high, which was made on 29 February. At the current trajectory, it will easily reach this price level in the time available.
Rather than looking at this as a forecast for a high, I would prefer to view it as a place to take (or lock in) profits. We need to ‘let the market tell its story’ when it gets there. It might power on through, which would indicate a very strong position. However, when Time and Price come together like that, there will frequently be some reaction, at least. This might offer the possibility for a good short trade or at least a chance to wait for the next buy signal.
At this stage the major trend in this market is up. Gann said that big moves happen from triple bottoms. We have seen accumulation followed by a big move. If the 29 February high is taken out, this would indicate higher prices still, and you can refer to Chart 1 for the next resistance levels.
So stay on the ball and be ready to take advantage of excellent opportunities like these.
Knowledge is Power!
Tim Walker
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