Advancing the Skill Set
In the Safety in the Market Active Trader Program and Active Trader Program Online Training (ATPOT) course, we encourage students to go beyond the ABC trade. That is, advance their trading skills from the Smarter Starter Pack to the Number One Trading Plan. This month’s article combines a few skills from the later of the two manuals to arrive at a more advanced trade which offered a much higher Reward to Risk Ratio than a standard ABC trade. That being said, foundational skills from the Smarter Starter Pack are still essential for the full understanding of this article.
The market in question is ASX top 50 member CAR – CAR Group Limited; and early last November in this market there was an opportunity for the bulls. Getting straight into the analysis, as at 4 November 2024, the weekly swing chart trend was UP with higher tops and higher bottoms and the market was poised to break out of an accumulation period. This is shown in the ProfitSource chart below in Walk Thru mode with the aid of the weekly swing overlay and the weekly turning points hi-lite.
One of the advanced trade entry techniques taught by the Number One Trading Plan manual is Breaking of Multiple Bar chart tops. Returning to the same chart we see that in the months immediately prior to November of 2024 there were a few old tops at a very similar level. By 4 November 2024 the market had closed above the September and October tops.
As for entering a long trade, there was a Long the Opener’s entry signal triggered as the market gapped up on open of trading on 6 November 2024. The clean break of the September and October tops and escape from the accumulation pattern proving the bulls to be in control.
Entry was at $38.51 as the market came back and passed the price of open of trading on 6 November 2024 ($38.51). The Number One Trading Plan manual stipulates to place the initial exit stop with a trade like this at 25% of the average daily range behind the open. This figure was 17 points which would have had your stop loss at $38.34. Another strategy however is to place your stop just behind the close of the previous day which can often act as a natural support or resistance level. This was at $38.16 i.e. one point below the close of the inside day that was 5 November 2024.
As for trade management, the last upswing of significance i.e. that of August 2024 was used as reference range, with points A, B and C placed as in the chart below, followinf the ABC Details window. The Reward to Risk Ratio Tool has also been placed on the chart with entry and exit parameters, needless to say the potential Reward to Risk Ratio will be analysed in full at the end of this article.
Only a day later on 7 November 2024 the market reached the 50% milestone and exit stops were moved to break even.
On 15 November 2024 the 75% milestone was reached and exit stops were moved a little higher to lock in some profit at 52c (one third of the average weekly range) below the 50% milestone.
And on 27 November 2024 the trade was exited at the 100% milestone.
Now for a breakdown of the rewards. In terms of the Reward to Risk Ratio…
Initial Risk: 38.51 – 38.16 = $0.35 = 35 points (point size is 0.01)
Reward: 42.39 – 38.51 = 3.88 = 388 points
Reward to Risk Ratio = 388/35 = approximately 11 to 1
If 3% of the account size was risked at entry, the growth in account size from this trade alone would be:
11 x 3% = 33%
With 3% of a $10,000 account risked at entry, the reward in Australian dollars would be:
11 x $300 = $3,300
Work hard, Work smart.
Andrew Baraniak