Before I continue, think about the types of trades that you take. What do you look for in a market? If I was to open a chart of a stock or commodity that you had never seen before, what process would you go through in order to look for a trade? Go ahead and think about it. I imagine there will be a different answer for everyone reading the newsletter! That’s because we all trade differently. But think about your process, and think about how many times a year it gives you a trading signal on your market. Now think about David’s comments on the number of trades he saw on a market over the course of a twelve-month period. Can you remember the number he gave?
David said that on average, he saw three to four ‘really strong turns’ on a market over the course of a trading year. Since we can trade both into and out of each of these turns, this provides us with around six to eight good opportunities to trade our markets each year. These ‘really strong turns’ are usually swing tops and swing bottoms on the monthly swing chart (and sometimes the quarterly or yearly swing chart), and that’s where I look for the majority of my trades. Why do I look on the monthly swing chart? Because of the Reward to Risk Ratio (RRR).
In the Smarter Starter Pack, David teaches you how to trade the Ranges of a market using ABC trades on a daily swing chart. On any given ABC trade, the RRR is usually around 2, 3 or 4 to 1. That assumes you are entering by 25% or 33% of the daily range and exiting at the 100% level. Taking this thinking a little bit further, if we can identify a monthly turning point in the market, and enter it using the daily bar chart, we can often enter a large monthly move within the 10% milestone on the monthly chart, which means our RRR can often exceed 10 to 1. If we ONLY take trades with a RRR of 10 to 1 or more, we only need to be right ONCE every ten trades, and we are, by definition, profitable traders. However, if you do your work properly and have the patience to wait for the right trades, you should be able to do a lot better than one winning trade out of ten!
Now, it’s not enough to just take a trade and set a target for a 10 to 1 RRR. The market needs to have a realistic chance of getting there! And that’s why I try to stick to the ‘really strong turns’ each year. I’m not interested in taking every trade available. I just want to take high quality trades, with a low risk (because they are high quality), a high potential reward (because I am trading a large move) and a high RRR (because we are using a small swing chart to trade a large swing chart). I call this approach of using a small swing chart to trade a large move ‘Wheels Within Wheels’, and it was discussed in-depth during last year’s Swing Trading Webinar. It is also covered in the Number One Trading Plan, under ‘Seasonal ABC Trading’.
So, how do we know that a turn will be a ‘really strong turn’? We look for Classic Gann Setups. David tells us that there are five components of a Classic Gann Setup. Unless you just got your Ultimate Gann Course yesterday, you should know what these five components are. This is what I look for in a market – Classic Gann Setups that appear as turning points on the monthly swing chart. We know that if the market turns and we are right, we should have a good run ahead of us, which will give us a high RRR. This is an example of what I call a trading benchmark.
A trading benchmark is something that we use to compare our potential trades with. As an example, I prepared a set of Trading Benchmarks for the last two years on the Australian Dollar for this year’s intake of Ultimate Gann Course Coaching. I looked at each of the major turning points and noted down exactly WHY the market turned where it did. In each of those cases, there was a Classic Gann Setup, without exception. The market doesn’t just turn at random – as David said, “there is always harmony around the major turns”.
There are many benefits to preparing this kind of document for yourself on your own market. Firstly, you get to know your market a lot better! Secondly, you get to practice all of your Ultimate Gann Course techniques over and over again! However, there’s more to it than that. You will come to see the harmony around the major turns that David talks about. You will see just how many reasons there usually are for a market to make a major turn. And the next time you think you have found a good trade, you can compare it with your benchmarks to see if it measures up. If the trade you have found is not good enough to include in your book of benchmark trades, then you should probably reconsider whether you want to risk your money on this particular trade that doesn’t appear to meet your standards.
After I gave my book of benchmark trades to my coaching group, I told them to study them well, and then to go and create their own set of benchmarks on their own markets, and I would give you the same advice. Imagine seeing a book of outstanding trading setups on your market, that calls all of the major turns. Do you think that studying the ‘best of the best’ trades on your market might shift your focus so that you started looking only for the ‘best of the best’ trades that gave you these benchmarks? Do you think that would make the whole exercise worthwhile? There’s only one way to find out!
All the best of the best,
Mat