As with all cycles there is a time to feel the joys of good times and the flipside when things seem to go against you. The time of the trader is certainly now, and it comes back to a recent comment that Mat made when reviewing David’s comments about not having to be in the market all the time. There are so many good trades why take the bad ones?

A follow on from last month sees the SPI200 still failing to conquer the 8,000-point level with the US markets pushing through their recent resistance and the stock from last month we discussed, Morgan Stanley, falling away as it reached $103 a share. Many markets are moving, and this is a key requirement for our style of trading, let’s avoid the ones that are sideways and problematic. This again is a strength we can harness in terms of not trading those markets.

The key driver for this month’s article is based on a recent experience as I found myself at a gathering of many institutional investors, predominately long only funds and how they see the market is very different to the single nimble trader. The long only funds are forced to participate in positions going south and they continue to hold, they of course have far longer time horizons, but they operate on a great deal of bias that the decision they made to get long will pay off given enough time. They also mentioned issues around EOFY and tax treatment of their positions. They are influenced by the tax implications of a position and timing of that tax so this can drive them to hold positions longer than we might otherwise, as tax benefits can flow their way. As I said very different to our mindset. I still remember a key interaction I had with an attendee of a Trading with Safety seminar many years ago who said they couldn’t afford to trade as they couldn’t pay the tax bill. That one will never leave me.

I managed to get into a deeper conversation with a long only fund manager who specialises in the mining sector and the ASX specifically. The topic of Rio Tinto came up and I was caught in two minds as to whether I should show this person a working chart of this stock that I run.

Over the years I have developed a nice gap trading system on this stock, built around basic price and time work and it certainly delivers when this stock trends.

Chart 1 sets up some important areas, the clear double top pattern is hard to miss. If I could only trade one pattern I would be hard pressed to go past double tops and bottoms, add some basic price pressure and you have a method.