Welcome all Safety in the Market traders to this month’s dedicated newsletter.
It’s been a good month for me since the last time I put ‘pen to paper’ for you. The title of last month’s article was ‘Watch Out – Profit Opportunities Ahead’. There we took a look at the short side of the Dow Jones and Australian Dollar futures. We also looked at the long side for the U.S. Dollar Index outlining a couple of trading opportunities to stalk in the context of ABC trades on this market.
This month I am going to take you through the finer details of an ABC trade that came up about 4 days after finishing that article. This perhaps was about the exact time you would have received this article in your inbox!
I know many of our students who have not attended the Interactive Trading Workshop would still find futures very confusing. That’s ok, you haven’t done the training, and you haven’t studied many if any trades. If you are serious about trading futures it would be a wise decision to get yourself along to this workshop. This case study will hopefully whet your appetite and for our Interactive Trading Workshop graduates, use this example to hone your skills.
Now this example has to be studied remembering the equal ranges work I have shared with you over the past couple of months. So please study this article in conjunction with revisiting all of my recent articles on the U.S. Dollar Index (DX-SpotV) to get the maximum benefit and insight.
Starting with Chart 1, I have the daily bar chart for DX-SpotV with the ABC highlights applied in ProfitSource.
Chart 1 – U.S. Dollar Index (DX-SpotV) Daily Bar Chart ABC Long Trade
click chart to enlarge
The basic details for the trade are:
- Point A – 7 June 2011 at 73.52
- Point B – 13 June 2011 at 75.37
- Reference Range = 1.85 or 370 ticks (0.005 equals 1 tick)
- Point C – 14 June 2011 at 74.59
- High of Point C = 75.00
- Therefore the Entry Stop = 75.005
- Stop Loss = 74.585 (Point C minus 1 tick or 0.005)
- 25% Limit = 75.055
The risk calculations for the trade:
- Entry Limit - Stop Loss = 75.055 – 74.585 = 0.47 (which equals 94 ticks)
- Each tick is worth US$5
- So therefore 94 ticks x US$5 = US$470
Referring back to Chart 1, the trade made it to 100% (76.445) within two trading periods.
The profit calculations for the trade:
- Exit at 100% - 76.445
- Entry achieved at 75.005 (Entry stop)
- Profit = 76.445 – 75.005 = 1.44 (which equals 288 ticks)
- So therefore 288 ticks x US$5 = US$1,440
Now this trade example has been simplified in a couple of small ways. Firstly with this trade the ABC formation occurred during what is known as a ‘contract roll-over’. What this means is that during the formation of the pattern, the main contract for trading went from the June 2011 contract to the September 2011 contract. Point A for this trade uses June figures, Point B and Point C use September figures.
The most accurate way to take an ABC trade during a roll-over period is by using the ‘pure’ chart of the contract you are going to enter. When I say ‘pure’, in this case I mean the September contract and you would study the chart with the ProfitSource code DX.2011.U which is the September contract only chart.
This is a trade that really set-up nicely for us and the result is very good considering the reward to risk ratio and the extremely low brokerage you pay when trading futures. If you are new to futures this might be a bit much, but you have to start somewhere. For our Interactive Trading Workshop students and above, you should study this example until you are comfortable with all aspects.
Until next month...
Professional Derivatives Trader