What I am illustrating here is the resistance points and rating the chances of any trade proceeding past a given point.
I know some trades will pass resistance points on any day of the week, but I am asking you to consider the chances. That is why I gradually change the background colour of the chart. Where I say, for example, that 45% of trades reach the 100% level, I mean 45% of profitable trades. They are the ones in which your strategy proves correct. 45% is an average figure from a large sample of trades.
Once again, when I get up around the 150% mark, I use a small amount of humour to illustrate a point. I must confess, I do not know of any traders who actually don full metal jackets once a trade enters these levels. What I am saying is that if you make your initial trade at around these levels and the market moves against you, it will feel like you are in the middle of World War III.
Throughout this course, I have identified various advantages that we all have. The ability to laugh is another of those advantages. It separates us from the animals. It is a way to break down pressure. Experience has led me to believe that it is hard to think on one’s feet in a war zone. It is hard to function effectively. The ability to smile, to laugh at ourselves, is the simplest and surest way to relieve the tension and to lessen our mistakes – often very expensive mistakes! At least this is how it has worked for myself and others around me.
Calculating Pressure Points
- We add percentages of the A to B range to Point C, the resulting number is the level of the 100% pressure point
- Calculate the 25% milestones up to 150%.
- Calculate the 33% milestones up to 133%.
- Pressure points are the important milestones on our Road Map Chart.
When it comes to ABC Trading we are calculating pressure points by adding percentages of the A to B Reference Range to Point C and watching for the market to re-act around one of these key levels. The easiest way to calculate your pressure points is to first divide the A to B Reference Range into quarters and thirds. Then, by adding these quarter and third percentages to Point C, we calculate pressure points up to 133% and 150%. A study of daily, weekly and monthly ranges will reveal many examples of markets reacting around percentages of the previous range. I refer to this phenomenon as the Power of Ranges.
The 50% Level
The 50% milestone is the Danger Zone for an ABC trade.
You will see I place a great deal of emphasis on 50% resistance points throughout these lessons. There are two reasons for the importance I attach to this figure. Firstly, Gann used it extensively in his trading. Secondly, I have found that it works. On the chart, I refer to it as the “danger zone”. Trades should break this point cleanly if they are to proceed.
Retesting the Danger Zone
On your Road Map Chart, I show where they can actually come up against the danger zone for a second time. This is a common occurrence. It’s called a test and re-test in most textbooks on technical analysis.
The dashed blue line represents how a failed trade will often unfold. It will firstly test the 50% pressure point and react from the level but then have another attempt at breaking the 50%. This is known as re-test. If the market retests the 50% pressure point under low volume and then reacts off the 50% pressure point a second time with increased volume you have a likely ambush of Point C on the cards.
The main confirming point of this test and re-test is the volume. Under these conditions, volume becomes a key indicator, so I have included it on your chart.
If you have low volume on the “test” and high volume on the “failure”, it shows the basic confidence rating of the moves. It shows that the “test” can easily turn into a rout. That’s how just about every professional trader and fund manager in the market will read these telltale signs. Do you wish to confront them head-on?
Exit Point – 100% Level
As you see when studying the chart, the higher percentage on the Road Map the lower the chance of the market reaching this target. Once a market exceeds the 100% pressure point you are into what I refer to as the Hard Hat area, where I emphasise the importance of using tighter stops after the market breaches 100% of the A to B range added to Point C.