The ongoing FTSE100 trade

How did it turn out?

As planned is the short answer.

The long answer is as follows:

First of all can I just say that I do NOT usually trade this index – I DO trade the individual stocks that form the overall index though – What I wanted to do pre-christmas was pick a market, any market and show you that by applying basic analysis just using Fibonacci levels and the DTosc, we could identify possible bottoms and potential target zones – all BEFORE price actually got to those levels – the key word here is BEFORE/PRIOR/IN ADVANCE etc

The actual levels are detailed in prior posts, If you remember we were originally using the 8 period DTosc to enter the trade – when we did we got stopped out – yes we ALWAYS use a stop-loss – When this happens it tells us that maybe the 8 period DTosc is not the correct settings (If you insist on using set indicator settings then occasionally you will come un-stuck, as the markets are not linear, they evolve and move which means that you have to be flexible with indicator settings you use).

OK so we were stopped out on the Bullish reversal of the 8 DTosc, at that time we need to re-evaluate our analysis – is the trade still displaying what we want to see  or has it completely ruined our analysis?  If the analysis has been discredited then we simply walk away and leave well alone as the criteria for entry is no longer there.

But this trade was still perfectly ok – the only mishap was the failed 8 period DTosc. let’s take a look and see what actually happened – we entered a long position on Friday 16th December following a 8 period DTosc BULLISH reversal, the market then fell and stopped us out – all key Fibonacci levels were still being respected so the trade was still a go,  but focus really needed to be moved onto the 13 period DTosc as well as the 8 period DTosc, as it was possible the 8 period DTosc was not the correct settings to use.

We STILL have our support zones and potential target zones in place – although the target zones need to be recalculated from the bottom.

Let’s have a look at the chart at that time

2nd Trade

Looking at the chart above we can see that price is still respecting the 50-61.8% fib levels (I have removed the green fib levels (refer to previous blog posts to identify) so to keep the chart as uncluttered as poss – those green fib levels are STILL valid and important though).  As of the last bar in the chart above we have had price ventured into the 50-61.8% fib support zone, the actual low was the low of the day, price opened, went down to form the low and then went higher to close near the highs of the day – that very act of closing near the highs of the day signals bullishness, with the 8 period DTosc making another bullish reversal from the OS zone and the 13 period DTosc looking as if it’s bottoming out in the OS zone the long trade is still a potential.  We now have 2 options, we either wait for the 13 DTosc bullish reversal (hopefully on the next bar) or we go aggressive and trade from this bar based on the 8 DTosc’s bullish reversal.  As the 8 period DTosc has failed once I preferred to wait for the 13 DTosc bullish reversal.

Let’s see what happened:

Trade 2

Ok on Wednesday 21st December 2011 we had a bar that went higher but closed towards the lows – but it caused the 13 DTosc to make a bullish reversal – so  I placed my entry 1 point above the high of that bar and a stop 1 point below the low of the bar on 20th December 2011 – I did this early morning on Thursday the 22nd December 2011.

As you can see from the chart above, Thursday 22nd December 2011 was an “Inside Day” (The bar is within the range of the prior day) – to me this does not matter what type of bar it is, what it did mean was that at the close of trading on Thursday 22nd December 2011 I could now move my entry point down to 1 point above the high of the latest bar – because my previous entry had not been triggered by the days action – obviously the stop remains at the lows.  Now (although small) my risk as reduced as I’m looking to enter at a lower level than previous.

Now a couple of things are running through my mind at this point:

  1. The level of the WEEKLY DTosc – it must be getting close to the OB zone
  2. IF the trend changed at point B to a downtrend, then I could just be caught trading a slight reaction to the upside
  3. IF the trend has changed to the downside, then those Fib zones identified and displayed on a prior chart in a previous blog post should be respected – so watch out for potential DTosc and price reversals at those levels
  4. If the trend is still to the upside (which is the basis I’m working on) then the high at point B is a target and ideally the 5700 area – identified a week or so PRIOR are still the target levels.

Now let’s see the outcome of the trade:

Trade 2

At the time of writing this is up to date.

I was long at 5470 with a stop @ 5327 = 143 points @ £2 = £286 at risk

This is more than I wanted to take but it’s well within my risk tolerance level so have decided to accept the trade.

Target areas are on the chart and once it’s at the old highs @ point B I’ll be looking to unload carefully – This trade was obviously going to continue over the Xmas period – so a slight disruption there as Ideally this year I wanted to have a complete rest/time off, but didn’t manage it due to this trade!

This trade went live on the last day of trading (which was actually a half day) before Xmas on Friday 23rd December 2011.

At the close of trading Wednesday 28th Dec 2011 the 13 DTosc was still bullish, price was at the extremes of possible Fibonacci support levels of the fall from point B to the 20th Dec 2011 low – at this point price could have stalled and gone down if the trend was to the downside, I decided to wait until the 13 DTosc told me to get out seen as I had used that to enter the trade.

At close of trading Friday 30th Dec 2011 – price was still around those levels and the 13 DTosc was now OB  & the 8 period DTosc was starting to flat-line.  This meant that the upside potential was getting limited.

I knew that this trade would head over the new year weekend, I did not want to keep an active eye on this trade as it had interrupted my Xmas hols already and decided to employ the follow plan:

  • Place a trailing 1 bar stop – this meant that my stop-loss was moved from 5327 to 1 point below the previous bars low – 20 on Fri 30th Dec that meant 1 point below the low on the 30th = 5534
  • This GUARANTEED me a profit, albeit small, but still a profit and it elimenated any potential loss from that point onwards.
  • I also set a profit target at 1 point under point B = 5630 – to exit the trade

Look what happened!  I exited 100% of the position at point B 5630 on Tuesday 3rd January 2012 = 5 trading days (due to Xmas and New Year) – I should have stuck out for the higher zone but as I was not at my trading desk much I had to play safer than I usually would have.

Trade Analysis

1 Stopped out trade = £ 140 LOSS

1 Successful trade = Entry @ 5470, Exit @ 5630 = 160 points @ £2 pt = £320 profit in 5 trading days

Potential profit if held for traditional target zone = 5700 – 5470 = 230 x £2pt = £460

Risk for the trade = £286 = just slightly great than a 1:1 risk/reward

I followed my plan (nearly) correctly – I just exited the trade early .

My concluding thoughts are that if you look back over the past few months you could have played this market for a 1:2 Risk/Reward outcome – you cannot expect every trade to give you a 1:3 outcome because if like me you are trading the short-term swings at some point the trend will slow down giving 1:1 ratios and even reverse the other way – this makes obtaining a 1:3 ratio all the time very hard to achieve – don’t get me wrong along the way you will obtain a lot of 1:3+ ratios but when things start to slow down those ratios will naturally move close to 1:1.

A 1:1 ratio is the smallest I would ever consider – think about the maths involved and you’ll be able to work out how many successful : unsuccessful trades you could endure with a simple 1:1 ratio – that’s why we need a good number of 1:2+ in our trading to make it easier.

Right now that’s it for the FTSE100 for me – but it’s working on the 13 DTosc settings right now – I’ll keep watch on this index as it’s the index that houses the shares that I prefer to trade.

The charts show that from August 2011 – Present (Jan 2012) the markets moved sideways with a slight bullish bias – I’m sure that there’s an Elliott Wave count for what’s happened, but I’m willing to bet that it’s been revised from what count was expected in August 2011 – Also if you’d have been trading Gann Swings you’d have been knocked from pillar to post – If you’d have been trading pure moving average crossovers again you’d have been whipsawed like anything.  The method I prefer at least has had a few successful trades.

I’d like to close this post off by saying that if you look at point B – most investors/traders would be looking for the market to be heading downwards – because we incorporated the DTosc with Fibonacci levels we were able to consider logical things that the market ought to do at certain areas – ALL IN ADVANCE THE MARKET getting to those levels!!!!!! This my friends is our EDGE – it puts you 2 steps in front of the average trader/investor and will help you to be profitable.

You’ll notice that I’ve not looked at or considered the trend of the market by way of moving averages or the time aspect for this market.  I wanted to show you how using basic Fibonacci and the DTosc how you could obtain support levels and reversal points in advance.

I hope you enjoyed this series of posts.

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