By Rob Colville on July 12, 2013 in
Multi year highs are just great. They give us one of the most efficient points to sell any instrument but with maximum profit potential in mind and are a rare treat. Typically, they coincide with key levels of resistance (areas of “supply”) and are a most welcome prospect for any trader who bothers to look at the “bigger picture” on the higher timeframes. If you don’t – you should!
Where price has failed to penetrate a level of resistance convincingly for a good length of time, albeit weeks, months or even years, it gives us the probability that sellers are due to come into the market and a green light for us bounce traders to look for sell opportunities.
Our FTSE short trade which we and our clients took on the weekly timeframe just this. Towards the end of May, having climbed to a 12 year high to a level unseen since the turn of the millennium and 2007 at 6722, this gave us a clear indication that there is likely to, at the very least, be some profit taking on the FTSE 100. If there was, based on this logic, we could prime ourselves short in the market to cash in on this. If this level represented a key reversal…then great, we would be in on the action!
On the 31st May we took this trade short on the FTSE’s weekly chart and sat patiently in this for five weeks.
Some clients took profit and exited the trade as the first “take profit” level, making a 6.5% return on their capital in week 4…others held on in there waiting to make more potential profits by leaving their trade open…it was a risk, but where there’s risk, there is reward.
The lower the probability, the higher the reward – the higher the probability the lower the reward: which profile of trader best describes you?
We were happy to risk 2% in pursuit of the 18.6% profit potential and accepted the fact that anything could happen at any time…and it did! The market told us in week 6 of the trade that the FTSE’s move down was merely profit taking or a “shallow retracement” and not the key reversal which the harbingers of doom warned for 2013…not that we were listening to them anyway. We simply traded what we saw, not what we thought in a mechanical, rule-based fashion.
Either way, we all made something from it!