Standing From The Outside Looking In

When back testing a market it is crucial that your results accurately reflect what would have been the outcomes in real time trading. The Starter Pack Software is an invaluable tool for the ABC Trader to locate trading opportunities. This week though I’d like to highlight a certain situation where you need to be more on top of your game or you could miss additional profit opportunities.

The basic rules for plotting the Swing Chart following an Outside Day say that you should wait an extra day to confirm the direction of the market before updating your Swing Chart. This is exactly what the Software will do following an Outside Day. But what happens when you have an Outside Day following a potential Point C? As long as the open and close pattern on the Outside Day are kind, you should by rights, be in the trade.

A perfect example to illustrate the point occurred on the SPI200 in November 2003. Chart 1 shows the market action around that time. November 13, 2003 lined up as a potential Point C for a short trade. Following the download of data that evening, an ABC pattern would have appeared, using your ABC Point Hilite. Before the start of trade on November 14, orders were placed one point below the low of the 13th. November 14, ended up being an outside day, with the open near the high of the day, and the close near the low. The entry orders were filled that day and based on the favourable open and close position you were still in the trade.

However being an Outside Day the Software enforces the rule about waiting the extra day before turning the Swing Chart down again, which is the action that confirms Point C. The Software now recognises the high of the Outside Day as a potential Point C, using the low of the Outside Day as the reference point for the entry. Theoretically this is correct, practically speaking we are already in the trade. The Milestones calculated for the original, anticipated Point C need to be recalculated using the high of the Outside Day in either case. When the Software considers the low of the Outside Day as the reference point for entry, the entry now appears outside the limits and the ABC Hilite for the trade would be removed. But once again, it’s of no consequence, we are already in the market short. I have used the ABC Pressure Points tool to apply the labels in Chart 1.

As you can see this trade went on to be profitable, reaching the 100% milestone. If you went back now and applied the ABC Hilites to the SPI200 (AAI-SpotV) you would not see this trade on the screen. Understanding the mechanics of how an ABC entry works and the influence of an Outside Day can make a significant difference. One way to speed up the process of checking for any profitable trades that may be overlooked is to apply the Outside Day Hilite. This way all Outside Days will be labelled a different colour and you can quickly scan through the chart looking for similar situations on this market or any other. It is your paper trading that builds your confidence and to miss profitable trades in your testing would be a shame

Until next week......

Noel Campbell