ABC Trading And Woolworths

Looking at the daily bar chart on Woolworths (WOW) the first thing that traders new to ABC principles will notice, is a signal to enter short on March 31. Clicking the Hilites button in the Starter Pack software is the easiest way to flag any potential trades. It also can be used to analyse the sequence and direction of all the previous ABC trades on the particular market you are looking at. You do need to ensure the parameters you are looking for in your trades match the settings you have in your software.

Following this process and executing the trade can be in many cases that easy, as the software has done most of the work for you. You would miss out on a lot of extra information if this were all you looked for when finding trades. I wanted to take you through the processes that I use when potential ABC trades are signalled.

Using the chart below you see the ABC short trade I mentioned on WOW with the milestones added for reference. Entry was signalled in this short trade at $11.85 with the initial stop loss placed at $11.98, bringing the risk on this trade to $0.13 per share. Keep in mind you could also use individual share futures or exchange traded options as your mechanism to trade this movement.

The plan at this stage is sound with an entry and stop loss price set in place. We also use the milestones tool to calculate where this short run potentially may take us. If this were the level of planning you put into your trade, I would caution that some extra work is definitely required. One of the most important concepts I look at when assessing an ABC trade is the strength of the trend that the market is in. Looking at a larger picture will help with this.

The second chart shows the price action of WOW since May 2003. A strong bearish move to the low in November 2003 presented highly profitable short trades, this has been followed by a solid bullish move to the current position in the market. I have circled some significant areas when projecting where a market may find support and resistance. Measuring the major cycle down using the Gann retracement tool from the software, the 50% milestone around $12.00 in January 2004, proved to be strong resistance. The subsequent run down then pulled up on the 25% milestone circled in blue. The study of price resistance and milestone theory served you well in the WOW example.

What works on a large scale will also work on a small scale. Using the same tool we measure the recent bull move from February 2004 low to the March 2004 high. We notice the same milestones, the 50% and 25%, coming into play on the smaller run. If WOW can continue its move lower and hold below the 50% milestone then the start of a longer bearish move may be on the cards.

Focussing on the ranges on the swing chart is also important. A great sign for this trade will be increasing volume and expanding ranges on the downside.

Good Trading

Aaron Lynch