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Aaron Lynch On reflection many looking at the market performance in the last 18 months would decree that they may, in some cases have exited too early. This is a common concern in the context of hindsight in a wildly bullish market. Having a plan that ensures you lock in profit is critical to any long term success as a trader. For many the tides have turned from previous years in the market from the disappointment of losses, to the concern that they are not making enough.
Milestone theory can create an excellent way to exit at the appropriate times and can also leave you wanting for a little more. There is a balance to this aspect of swing charts and Gann's work that can allow you to “pyramid” your positions and also leave your stops in the appropriate place.
Take Coles Myer, CML, on the ASX; this market has performed in line with the strong bull moves of 2004 - 2005 by nearly doubling its price from the March 2003 low of $5.51. The chart below shows the recent market action and the bigger picture in regards to the last two sections of the bullish move. A solid pullback from the all time highs ensued with an eventual bottom and bounce on the 75% milestone.
Chart 1
click chart for more detail Combining this support with the ABC method the last two long trades have been great trades. The chart below signals the most recent ABC long. There has not been another signal since late February 2005, however, the market has continued to rise. Had you followed the milestone theory and taken safe exit at 100% a tidy profit would have been taken in early March. Using a different approach we could have continued to stay in the trade.
By trailing the stops behind each higher swing bottom (blue circles) as it has formed, this would have continued to keep you in the trade. An extra point to note is that had your money management rules allowed it you may have considered adding more to the position as it crossed the swing tops. It is important though to pyramid correctly by adding reduced amount of contracts / shares at each subsequent top, not more.
Chart 2
click chart for more detail One critically important tool to identify the strength of any move in the swing chart is by watching the ranges. The next chart identifies that buying pressure has continued to move through as there has been steady or increasing upside ranges with a rising accumulation/distribution index as a confirmation indicator. As the bulls are continuing to support each drive with greater enthusiasm, it is important to also contrast the bearish swings have also been increasing.
Chart 3
click chart for more detail Deciding to stay in for a longer pull does not require you to throw away all that you know about exiting safely in a run. Just ensure that you are watching for a confirmation to back up your actions. To this point trailing stops behind each swing bottom is a good strategy. Watch carefully for a change in trend and the swing ranges to start contracting on the upside and expanding on the downside.
Good Trading
Aaron Lynch
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