Over Above 50 Percent
Continuing the theme from last month’s article I’m focusing on finding Overbalance in Price ABC trades above or below a 50% retracement as a key to picking higher probability ABC trades.
I’m looking for:
- Overbalance in Price daily long ABC trades above 50% only
- Using ‘Stock Style’ trade management.
The same approach applies to short trades but for this article I shall keep to long trades only.
First trade I want to look at is a recent trade on Woolworths, ASX code WOW.
On the big picture quarterly swing chart, we’ve seen Woolworths make two contracting swings down of $9.05 and $8.25. This market then pushed back through the large 50% retracement to the upside.
Chart 1
Going straight to the daily bar chart there was a daily overbalance ABC presenting itself on 27 May. We saw a contracting range into the 14 May low, followed by an Overbalance in Price of $2.70, then a contracting range into 27 May, whilst trading above a very large 50% retracement.
Chart 2
Using the Stock Style trading plan, we need to be in by 25%, then move stops to entry plus commission once the 50% milestone is hit, then take profits at 75%
This trade gave us an entry on 28 May, not without a little scare on 2 June with a little double bottom! The market moved away and on 4 June touched the 50% milestone, triggering moving stops to E+C. Then on 9 June the 75% milestone was reached, causing the trade to be closed out with a profit just over 2 to 1 Reward to Risk Ratio.
Chart 3
The previous Overbalance in Price trade to the upside formed on 9 March. However, one thing to note about this trade is the abnormal size of the A-B range and often when a swing range is abnormally large, it is unlikely to repeat.
In this instance, if you had taken this trade, you could have easily been in well before 25% but you would have been stopped out for a breakeven as the market only managed to get to the 50% milestone.
Although it was still possible to take over a 2 to 1 Reward to Risk Ratio trade as entry into this trade was well before the 25% milestone.
Chart 4
Looking at a different stock, ANZ, I have found a big range to run a Ranges Resistance Card over and found my 50%. June 2022, ANZ found support on the major 50% retracement.
Chart 5
The first Overbalance in Price ABC above 50% gapped up on entry outside the 25% limits, and therefore no entry.
Chart 6
The next Overbalance in Price swing occurred on 11 July however, this trade couldn’t be entered within the 25% entry limits either so again, no trade.
Chart 7
27 July the next Overbalance in Price ABC formed however, again this trade was outside the 25% entry limit and no entry.
Chart 8
14 September was the next Overbalance in Price trade, and this time was within the 25% entry limit. On the same day of entry, you could also move stops to break even. Exit target would have been reached on 20 September to lock in another 2 to 1 Reward to Risk Ratio return.
Chart 9
This is a very simple trading strategy that could be applied across many different markets to make a positive return on capital. I would encourage anyone wanting to take these types of trades to do some more testing and come up with your own plan!
Happy Trading,
Gus