Swing Trading: The Long and Short of It
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October 23, 2008
For those who have been trading the equity markets, times have been tough. Stocks have been falling, but it is not possible to trade them on the short side. That does not mean that we should ignore ABC short trades that show up on the chart. At some point the move down will end, and there will be long-trading opportunities.
We can still use our ABC analysis to identify when we would expect a bottom to occur. This would also be a good time to brush up on some ‘change of trend’ trading techniques from the Number One Trading Plan. Overbalance of Price or First Higher Swing Bottom trades are good examples. These are the sort of long trades we might expect to show up in the next few days and weeks.
I will illustrate this with a look at our usual stock, Santos (STO: ASX).
Chart 1
click here to enlarge
Since the all-time high in June, there have been 7 ABC trades, of which 5 are short trades and only 2 are long trades. Of the 2 long trades, one (in late August) reached 75%. The other (in late September) was the sort of ABC trade you should never take. Before you go on and read why, stop for a moment, look at the chart above, and see if you can answer the question yourself.
The reason is that you are trading against a double top. At least in this case you would have reached 50% before the double top was hit, but the odds are against you here, so stand aside and wait for a better opportunity.
There is one point I’d like to make about the latest ABC short trade. You’ll see that I have marked on the chart ‘Abnormally large A-B range’. If you check the ranges on the 1-day swing chart, you’ll see that it is more than twice the size of every other downward swing over the past few months. As you can see, the trade has been filled, but what are the chances of it reaching 100%? Prices would have to fall to $5.43, a level not seen since 2003. Not impossible, but the odds are against you.
Let’s have a quick look at the bigger picture.
Chart 2 – Reasons to Watch for a Change in Trend
click here to enlarge
If you look back over the previous articles I’ve written on Santos, I haven’t said much about time, for the reason that many of you will not have studied the Ultimate Gann Course yet. However, as we are running a series of Gann Jump Start workshops at the moment, where we introduce time analysis, I will include a little here.
Back in my article in Trading Tutors Newsletter No. 244 I referred to a time frame of 64 days between turns. If we count the days from the all-time high on 3rd June to the significant low on 6th August, we find it is 64 days. Going forward 64 days from 6th August we get 9th October, 1 day before our current low. This low is also around the support level of the lows in January, February and March.
So to return to the point where we started, it would be a good time to review the advanced entry strategies from the Number One Trading Plan.
Knowledge is power!
Tim Walker
Trading Tutors Team
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