ABC Trading - Outside Day Entry

When starting out with the ABC trading system most traders identify the pattern and set their milestones based on their anticipated Point C. The following day the market will either confirm their view and the trade is entered or the anticipated signal will not be forthcoming. The very important point to note is that the stop loss orders and their roadmap for profit taking will have already been calculated. To change these parts of the plan, like stop losses and milestone placement, is wrong in nearly all cases once the trade has begun. However, it is required when the day you enter is an outside day.

The decision to enter the market is based on the swing chart. In using the swing chart it also defines our initial stop loss point. When an outside day occurs you will need to recalculate your plan to adjust the initial stop and also the subsequent movements of your stops based on milestones.

Looking at a very recent example St George Bank SGB, April 23 was a confirmed ABC short trade. However, our original plan to enter the trade would have been initially completed based on April 22 data.

The initial orders to enter the trade could be calculated from the chart or taken directly from the Safety in the Market software as shown below. Initial sell orders were placed at $20.56, circled in red and the initial stop loss orders were placed at $20.66, circled in blue.

Using these calculations would have seen the trade filled on April 23. The original stop loss order was placed at $20.66 in case the market continued to move higher. The only concern is the stop here may be a little tight considering the new swing top that will be formed on the top of the outside day. This would be the only time that you would move your stop against the direction of the trade. Remembering that the swing chart determines the placement of the initial stop. In this trade the initial stop on the first day of the trade at $20.66, would be moved to $20.74 to take into consideration the outside day.

As a market moves in our direction we progressively move the stop to ensure that we lock in profit. Those familiar with milestones will understand their significance. This is where the second step comes into the recalculation of this trade. As the high of confirmed Point C has actually changed. We need to run the milestones from the high of April 23 not April 22. The software plays a useful part here as a new plan with all the new calculations can be easily created.

We see that the stop has been moved, circled in red to our point just above the high of the outside day. Also note the new milestone calculations, the 100% point based on April 22 would have seen an exit taken at $19.30. Using the new Point C reference the 100% milestone has been calculated at $19.40.

Understanding how to get the most from your plan comes from practice and experience. The small adjustments made in cases like these can often lead to better results. This trade has much I would like to discuss but maybe another time. For those who like to do a bit of research take a look at the ranges on your 2 day swing chart and also the current position of SGB when looking at big picture ranges this may lend a good perspective to where it is potentially going.

Good Trading

Aaron Lynch