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Welcome to Trading Tutors Weekly Review |
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This newsletter is written on a weekly
basis to help investors understand and learn the
principles of market analysis for themselves. We don’t
provide investment advice, but we do aim to provide a
straight talking review of the market action over the
previous days with a focus on how real life analysis
techniques could be applied.
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Issue #76: 24 September 2004
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Lock It In! |
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Tom Scollon
Chief Editor |
One of the hardest actions to take is to lock in profits – no matter how small. Never castigate yourself for taking profits too early.
The taking profits motto applies to all financial instruments and to all periods in the market. The aim of all traders – I can safely assume – is to buy at the bottom and sell at the top. Or if you are short selling, to sell at the top and buy at the bottom.
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There is no harm whatsoever in having that as an aim. The reality is of course few succeed in trading at the extremes consistently. That would be a rare achievement. The reason being is that the successful traders accept that fact and are happy to take their profits from the bulk of the move.
The ‘bulk’ of the trade will depend on the time frame you use for investing. If you are an intra day trader then you are looking for an early break when you buy or sell and you will trade on the change of a trend.
If you are a long term investor you are probably watching a weekly chart to confirm entry and also to confirm exit.
I find that by using a weekly chart as the last bastion I am unlikely to take profits too early which is a catch cry I regularly hear and an experience I have also had. By using a weekly chart and say a moving average, Bollinger band, a channel or similar this will help avoiding taking profits too early and avoiding significant losses.
Market Depth is a very handy tool for the short term traders for timing entry and exit. On Balance Volume is a great indicator for the longer term investors. If you would like to read a more in depth article on Market Depth and OBV click on www.sharesbulletin.com.au
Enjoy the ride!
Tom Scollon
Editor
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Pulling It All Together – Trading Mastery |
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Noel Campbell
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Having run seminars all round Australia and Overseas I have had the chance to meet with many traders and do my best to help them on their way to success. While trading on its own can be a very individualistic endeavour, teaching people how to trade is one way of putting energy back in the system. At times though it can be an unknown as to how those you have helped are progressing using the lessons taught. Often what can happen with those who go on to be successful in trading is they tend to go underground and keep their trading mainly to themselves. Which is fair enough, considering the work that goes into making a long-term success of trading.
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At the recent Interactive Trading Workshop I met up with one of our traders who had been to a number of seminars, working hard to get his trading just right. He took the time to talk to me about one of his most recent trades and how he pulled the ‘pieces of the puzzle’ together and got it just right. Listening to what he had to say and how he described the events that unfolded sounded just like a lesson I’d have given in the past, just a new example that was all his own. It was great to hear just how effectively he could describe the whole trading set-up. I must say it gave me a buzz.
I’m sure he won’t mind me sharing the details with you of how he put the trade together. Chart 1 shows some of the market action on the SPI200 contract over the past 3 to 4 months. The market made a significant low on 11 May (3332) and moved up strongly to top on 12 July (3580). The first thing to note is the market was turning around the same time of the month. The market then retraced to low on 13 August. The 50% retracement level for the run up was 3456. The market reached a low at 3452, just 4 points from an exact 50% pullback. That’s one part of the price side of the argument. This low was also 90 degrees in terms of Time by Degrees from the May low, adding time to the puzzle. That’s a simple example of time and price coming together. Now, how best to trade this set-up?
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Chart 1
click chart for more detail
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Chart 2 is the more recent market action on the SPI200 focussing on the bar and swing chart using the Swing Overlay study in the Software.
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Chart 2
click chart for more detail
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As you can see leading into the August low the down swings were showing contraction, although the trend was still clearly down. Having gone short on the next confirmed lower swing top, using the August low as Point B. He realised two days into the trade (after the market had failed to break Point B) that should the swing chart turn back up, showing a higher bottom, there would be a complete change in trend.
A more subtle point that was also noted, is that should this be a higher swing bottom, the latest swing down would be under 50% of the previous swing, showing danger. With all this in mind he doubled up the stop loss above the Point C, so that should the higher swing bottom be confirmed, he was out of the short trade and automatically long. Sheer perfection, as the result speaks for itself. I know that the trade was at least held beyond the next down swing, as the market made its way higher. This was his best trade to date and paid for the course on its’ own. It was fantastic to hear how he put all that knowledge together and then executed the trade to perfection. We work hard at sharing with you the best information we have available and continue to refine how we approach the lessons we share. To just hear how you can put it all together for profit in the market, makes this job so very rewarding. Well-done Frank!
Until next week......
Noel Campbell
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Cisco Systems – 3 Day Swing Trade |
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Aaron Lynch |
Following on from last week’s discussion on News Corporation NCP we examined the idea of trading a price forecast of a 1 day swing chart. This trade exploded over the next few days and returned a tidy profit from a relatively simple set up. Taking this same strategy but applying it to a different time period can also make fantastic returns. By looking at a 2 or 3 day swing chart we open up the potential for greater reward and a longer time frame in the trade. |
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Many ABC traders focus there analysis on the weekly chart, which is an extremely valuable way to tackle the market as it holds you in for a larger move and increases the reference ranges. There are two distinct disadvantages to this style of trading. Firstly it opens up a greater risk as a dollar value and secondly the trades will be less frequent. I find that using a 3 day swing chart will fit somewhere in between these daily and weekly and can get you into the longer pulls a little earlier. The details of trading on the 2 and 3 day swing charts is a lesson I cover at the Interactive Trading Workshops.
The trade in point this week is on Cisco Systems CSCO and has some strong reasons to make a bullish move. The chart below shows the daily bar chart with a 3 day swing chart overlayed. The price action has been steadily moving down since the January 2004 highs. The area I am labelling, point A, has some strong price and time support so I am looking for the price action to rally from here. At this stage the 3 day swing chart has not officially turned up yet. What it will take is a higher top and higher bottom bar to signal the entry. Another point to note is that we are not seeing an ABC long signal on the weekly chart, and to wait for this to trigger may yet be some weeks away. Trading of the 3 day swing chart is providing an earlier entry.
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Chart 1
click chart for more detail
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The chart below is using the manual ABC pressure points tool and is highlighting the trade in question. Important points to remember is that all our rules are the same for a 1 day swing trade especially entering by your limits. The entry price for this trade is $19.72 with a limit of $19.97.
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Chart 2
click chart for more detail
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The final chart below builds the case as to why I like a bullish move from this point. The market is currently holding above the 50% milestone (marked in blue using the Gann Retracement tool). The price action initially gapped through 50% but has made a consistent move to now hold above.
The other point on this chart to note is the orange line. This is the type of main Gann angle we use off the March 2003 low, a date we base a lot of our time analysis from. Running out the angle, CSCO has come to rest exactly on the line where it has found support.
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Chart 3
click chart for more detail
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Combining these points with our basic swing rules, of expanding upside ranges and contracting downside ranges we are set to trade. Of course if we enter this trade our money management rules and stop loss strategies will limit any major risk in taking this position.
Good Trading
Aaron Lynch
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Ceilings and Ladders |
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Jordan Craw |
No I’m not talking about a new twist on the old board game. Instead some popular applications of the trusty Bollinger Band. The Bollinger Band is a widely known and used indicator which is a testament to its inventor, John Bollinger. Bollinger Bands work by plotting a line above and below the majority of a market’s price action. Essentially these lines are drawn based on standard deviations up and down from a moving average. The most common setting is 2 standard deviations on each side from a 20 day moving average. However, there are a number of variations, including the use of a 13 day moving average which I personally find useful on various time frames.
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The problem with Bollingers is that like many technical indicators, they can be subjective or prone to offering false signals. Having said that, this relates more to the user’s application and interpretation than the tool itself. While quality signals hinge on testing your plan, there are a few tips that were of use to me when I first learnt to use Bollinger Bands in my trading.
Using either of the standard settings described above, it is true to say that when a market moves below the lower limit it is potentially over sold. However, as we know, being oversold is not enough to change a market’s trend instantly. Often markets will linger at oversold levels to gain strength or fall into deeper oversold territory. All a bullish trader should be interested in is confirmation that the market is now changing trend before taking a position.
Assuming we are using Bollinger Bands as our sole indicator and trigger for the purpose of the example, the angle of the limit being breached is of high importance. If a limit holds an angle similar to the stock’s movement toward or through it, strength in the trend is suggested.
Extension’s beyond the upper band while it is running at an angle similar to the stock’s movement are known as climbing the ladder and generally mark a continuation in a strong uptrend. Marked as ‘1’ on the following chart.
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BHP ‘Climbing the Ladder’
click chart for more detail
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The closer to horizontal that the limit line is when crossed the better. The price action marked ‘2’ highlights an example of a ‘head in ceiling’ pattern. Once this occurs, it is reasonable to expect a retracement at least back to the middle line of the Bollinger Bands.
Example ‘3’ shows the reverse, however this time the band has turned to meet the stock price. This offers an even stronger signal of an intimate change in trend as it shows weakness in the existing trend.
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BHP Ceiling, floor and Ladder
click chart for more detail
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I leave you with an example of a Bollinger Band set up forming at the time of writing. Marked ‘4’ on the chart, you can see the extension beyond the band has it printing on an upward angle. It is now a matter of waiting for the next bar to confirm the upper limit angle. A continued upward angle will indicate strength in BHP’s current uptrend, while a flattening will indicate a retracement back to around $13.20 and possibly a change in trend.
Bollinger Bands are an indicator that I have found very useful, not generally as a sole indicator, but more as a confirmation tool for other indicators. As you can see, they can be used to confirm a potential change in trend or the strength and continuation of an existing trend. Until next week,
Happy trading…
Jordan Craw
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Taking Advantage of a Price Gap |
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Marshal de Saxe |
A GAP is a term used to describe when a stock opens at a higher price than it closed. The word GAP refers to the gap that is left in the daily chart, the empty space from yesterday's close to today's open. Gaps can be either up or down. They can happen to all stocks.
There are a few theories but one of the more successful is placing a trade to take advantage of the stock chart filling the visible GAP that has formed.
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Let’s use LHG (Lihir Gold) as an example;
The gap below is roughly $0.29. If it was to fill the gap, what potential trades are there to take advantage of this?
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WES Weekly Bar Chart
click chart for more detail
Let’s consider the following two;
- Buy the stock
- Buy a Call option
Let’s look at each individually;
Buying Stock
If we were to buy the stock firstly we would have unlimited risk which is not good, and secondly we would be outlaying large amounts of capital.
But if you were to buy the stock regardless of the above mentioned limitations, and we bought 5,000 shares our max profit, if LHG retraced and filled the gap of $0.29 from $0.97 to $1.26, would be $1,450.00. Remember you are risking $4,850 and your risk to reward profile is 30% which isn’t very attractive.
Buying Options
Since all Australian option contracts control 1,000 shares of the underlying we will need to buy 5 Call contracts to control 5,000 shares (as in the first example).
Let’s have a quick look at an option matrix displaying only LHG November 04 Call options;
Code |
C/P |
Expiry |
Exercise |
Bid |
Offer |
Last |
Volume |
Open Int |
Margin Price |
Status |
LHG3E |
C |
25/11/04 |
0.010 |
0.000 |
0.000 |
1.005 |
265 |
410 |
0.990 |
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LHGZS |
C |
25/11/04 |
0.700 |
0.310 |
0.310 |
0.000 |
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0 |
0.295 |
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LHG3R |
C |
25/11/04 |
0.800 |
0.220 |
0.220 |
0.000 |
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10 |
0.205 |
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LHG35 |
C |
25/11/04 |
0.900 |
0.120 |
0.140 |
0.000 |
250 |
260 |
0.125 |
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LHG1Y |
C |
25/11/04 |
1.000 |
0.060 |
0.070 |
0.070 |
556 |
2670 |
0.065 |
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LHG13 |
C |
25/11/04 |
1.100 |
0.025 |
0.035 |
0.030 |
83 |
1769 |
0.030 |
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LHGYV |
C |
25/11/04 |
1.200 |
0.015 |
0.020 |
0.020 |
250 |
4278 |
0.015 |
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LHG3F |
C |
25/11/04 |
1.300 |
0.000 |
0.000 |
0.000 |
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219 |
0.006 |
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LHG2P |
C |
25/11/04 |
1.400 |
0.003 |
0.003 |
0.000 |
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588 |
0.003 |
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LHG3C |
C |
25/11/04 |
1.500 |
0.000 |
0.040 |
0.000 |
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731 |
0.001 |
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LHG2T |
C |
25/11/04 |
1.600 |
0.001 |
0.001 |
0.000 |
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0 |
0.000 |
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LHG2R |
C |
25/11/04 |
1.700 |
0.000 |
0.000 |
0.000 |
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110 |
0.000 |
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LHG3A |
C |
25/11/04 |
1.800 |
0.000 |
0.000 |
0.000 |
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24 |
0.000 |
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When buying Options it is very important you give the stock time to reach your target, so if we think its going to take LHG 35 days to fill the gap we will need to buy a put option with at least 60 to 90 days left to expiry (do not own stocks with less than 30 days left to expiry as time decay becomes very expensive). Secondly we should be trading options that are at the money to take advantage of a higher delta to cost relationship. Delta is the relationship between the option price and the underlying stock price, eg: if the stock goes up $1 and the delta for the option is 0.5 the option will go up 50 cents).
So let’s buy 5 November 04 $1.00 CALLS @ $0.07 costing $350.00 with a delta of 0.53.
With the stock filling the gap (Gaining $0.29) lets say over the next 35 day’s the option premium is now worth $0.20 which is a 285% return. This is a great risk to reward scenario and remember we are only risking $350 not $4,850.00.
So our total profit using call options is $1,000.00 (taking into account time decay), which is better than buying the stock and at the same time having a fraction of the risk.
Seize the moment
Marshal de Saxe
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I Need Help |
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Sinan Koray |
I need help learning. We all do. Let’s go back in time to my first Trading With Safety Seminar. I had a mild interest in trading and had attended a few other presentations offering products and services. Nothing had grabbed my attention thus far. My interest perked up as I listened to the stories about W.D. Gann, Swing Charts and stop losses. Then I heard what is offered: self study course, seminar and “… unlimited trading telephone and email support.” Really? I check and double check. Yes, it is true. Is there a limit of how many questions I can ask? No! Wow.
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I signed up and started studying. It was not easy going. I needed help. I rang, and got my questions answered, and again, and again. I sent email after email. I had hesitations many times:
- maybe this is a stupid question
- maybe I am asking too many questions
- what if they get fed up with me
- maybe I will be told I have used up my “question” allowance.
Not true. I was treated with respect and patience. The trading wisdom that I was exposed to got me more excited about trading. I got to realise that it was OK to ask questions, lots of questions.
Do you have questions? Do you need help? What do you do with your questions? Do you stop yourself from raising your hand at a seminar or workshop? Do you hesitate to pick up and call a help line or a fellow trader? Do you cringe at the thought of posting a question to a forum? What do you say to yourself?
Is your reticence to seek help enhancing or hindering your trading? Is it time to change and say to yourself: It is OK to need help. It is OK to raise my hand. It is OK to ask questions. It is OK to ring for support. It is OK to post a question to the discussion board. It is OK to discuss this with a fellow trader.
Believe, achieve.
Sinan Koray
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In summary, here are many avenues available to you: Training Courses & Workshops, Help lines, Email support, Forums and Discussion Boards, Fellow Traders, Brokers, Accountants. Remember if you never ask, you never get an answer.
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