Against the Odds
The S&P500 declined close to 35% as the COVID-19 pandemic took place. If we look at the average of price declines over the last 20 years, the average decline on the S&P500 was -47.68%. The Great Depression in 1929 was largely an outlier, so if not included in the data sample, the average decline was 42.88%.
In terms of duration, the average duration of these crashes is 20.7 months. Assuming the COVID-19 crash started when the market dropped -36% in February 2020, economists could likely expect a full recovery by September 2021, yet within 5 months we had a 110% recovery, breaking into fresh All-Time Highs.
Looking back 12 months, it feels like a lot has happened, which when thinking about it, not much has happened. Nevertheless, one thing which should be clear is the hysteria.
While the above data is only for a period of cycles, Gann said in The W.D. Gann Master Stock Market Course that:
“Everything has a major and a minor [cycle], and in order to be accurate in forecasting the future, you must know the major cycle, as the most money is made when extreme fluctuations occur.”
Which brings me to the next point of making money. As mentioned previously in articles, there are multiple ways to make money in the market, as well as lose it. One of the more insightful ways is written by Gann in the W.D. Gann Master Commodities Course; How to make the most amount of money in the shortest period of time. Understanding the position of the market it is clear why professionals don’t get caught up in the hysteria and they follow the trend.
If we take a minute to review Gann’s points, he is essentially compiling three main points in order to make big money in short periods of time. These include:
- Do not try to outsmart the market or yourself.
- Only trade with the trend and follow institutional money.
- Trade to definite trading rules, which should always include an entry, exit, trade management and pyramid strategy.
Trend following is natural and not that complicated. However, complicated and easy is a juxtaposition. Trend following probably is to be one of the hardest and easiest things to do.
David Bowden designed the Smarter Starter Pack as a rule-based trend following system which is effective. The Smarter Starter Pack combined with the Number One Trading Plan allows you to maximise your strategy and knowledge to do exactly what Gann suggested over sixty years ago. And yet, you can give 100 people the definite rules and only a handful will make money. Why is this the case? Is it our emotional baggage? Or misunderstanding of the trading system?
Turning to Tesla, which trades on the NYSE (ProfitSource Code: TSLA). Multiple articles have been written about the bull run that occurred on TSLA. This strongly trending market could have replaced multiple years of income, even if for whatever reason you only ever had time to trade the weekly chart, which has presented five ABC trades since the start of the run, with a sixth currently present.
It isn’t about being first to market but being consistent with the market. Understanding that there is an abnormal trend taking place is the first step. Once you have this skill, you can trade the bigger timeframe to lock in some profit. Take some time to focus on the first Weekly ABC trade back in August 2019.
If we turn to the Higher Swing Bottom trade, entry would have to be obtained by 25%. Note that the weekly upswing is expanding and the downswing is contracting. The retracement is slightly higher at 62% (which Tesla typically likes to do).
|
Entry Limit |
$233.26 |
|
Entry Stop |
$229.10 |
|
Exit Stop |
$210.99 |
|
Account Size/ 5% Risk |
$10,000 / $500 |
|
Risk Per CFD |
$22.27 |
|
Number of CFD’s |
22 CFD’s |
Entry would have been obtained at the 25% level around $229.10.
The market spent a few days consolidating followed by a large push higher. Note that it did not hit 50% on this week. You may have had the temptation to move your stops to entry plus commission, which may run the risk of getting stopped out.
The week during the 27th of September 2019 would have caused a bit of an emotional ride. The market came back down past the point of entry before it finished in the top 50% of the week. Assuming you moved your stops to entry plus commission you would now have been stopped out.
As the market likes to play, a few weeks later the market rockets away. At this point, you would have been wishing you didn’t take all the profit at 100%.
As a result, a safe exit at 100% was $300.07. Entry at $229.10 would have made a profit of $70.97 per CFD or $1,561 minus any commissions and interest.
Too many times we try to make simple things more complicated! There are those who think simple means unsophisticated or impossible to generate money. They are very wrong and track records going back decades from many trend followers prove them wrong.
The key to success or compounding money over time is the ability to stay focused, stay disciplined, follow the plan, and have patience. This is the holy grail in trading!
It’s Your Perception
Robert Steer