Noel
Campbell 		One point that comes through loud and clear at the Trading Tactics Workshops is how much clients benefit from being taken through an example of a recent trade. This week I will step through the details of a recent Double Top trade on NAB. Depending on which perspective you take, the market produces Double Top and Bottoms on a regular basis. If you are watching the market intraday you will find that they occur almost on a daily basis. However in many cases the ranges you are dealing with are too small to warrant getting too excited about the opportunity for profit they provide. The further apart, two tops or bottoms are, in terms of the time between them, the greater the potential strength of the Double Top or Bottom trade produced. The example to be used here definitely has us taking a larger perspective.

Chart1, a weekly chart of NAB, shows a period of around 18 months. NAB made a high of $34.50, week ending 8 November 2002, and has formed a Double Top at $34.42, week ending 20 June 2003. To establish a reference range for this trade we use the lowest low between the two tops, which is $28.36, reached during week ending 14 March 2003. This gives us a reference range of $6.14 or 614 points when thinking ISF’s. This is an attractive reference range in any trader’s language and gives us plenty of opportunity to enter by 25%. The week following 20 June 2003 was an inside week and therefore failed to confirm the Double Top on our Swing Chart. This inside week gives us an opportunity to raise our initial entry price to a level one point below the low of the inside week. The trade was entered on the Monday of the week ending 4 July 2003. You cannot always be sure the market will trigger your entry orders on the Monday of the following week. Therefore you need to be prepared to enter the trade at any stage the following week, say for example Tuesday or Wednesday, you do not wait until the end of the week to enter the trade.

Chart 1

click chart for more detail

In this example, we will take the trade using NAB ISF’s. The contract months for NAB are January, April, July and October. Considering the perspective used to identify this trade we will need to look ahead to determine the best contract month to trade. We may be in this trade for a number of weeks and therefore the spot contract, July (at the time of entry), would most likely expire before we exit this position. Keeping this in mind we should enter the trade in the October contract and thus avoid the need to roll the position over when the July contract expires, which is approximately two weeks after entering the trade.

A final point, considering the large reference range and the ease with which we entered by 25%, you may apply a more conservative approach to the movement of your protective stops. By the time the market has reached the 33% milestone, you are in profit over 100 points per contract for this trade. When dealing with an abnormally large range as we have here, you are wise to move your stops to entry plus commission as the market passes through the 33% milestone. With this in mind the exit stops for this trade are now placed at a few points below your initial entry price to give you a small profit to cover brokerage costs. The key thing for this position now is that we are in a no lose situation.

Successful trading to all…

Noel Campbell