By Rob Colville on October 28, 2016 in
With the collective eyes of the market largely focused on the FTSE and its latest test of all time highs just above 7114, traders around the world are likely considering initiating short positions. It seems likely, afterall, that at some juncture, the market will fall back from these all time highs.
When or how that happens, however, remains to be seen. In the meantime, it makes for a rather high-risk trading opportunity, but one that we feel may be worthwhile nonetheless for some non-risk-averse traders…and here’s why:
For obvious reasons, all-time highs carry enormous technical significance, as there’s a very high likelihood that the market in question will behave the same way it traditionally has, reversing off of those levels.
As a result, all time highs represent technical junctures in which traders tend to have even more confidence, and while the usual backdrops like trend line, range, or moving average support or resistance are often enough to justify trading, all time highs like those soon to be retested on the FTSE daily chart (see below) are all the more compelling.
As shown above, price is approaching the all time highs just above the 7114 level, while RSI divergence (see lower chart panes) is acting as something of a confirmation signal. The ideal trade scenario—in our minds, at least—would be a pin bar reversal at or near the all time highs, which would signal a trading opportunity that’s essentially “by the book” in terms of our strategy and rules for execution and risk management.
Being that the all time highs are in play, though, we might even entertain placing a short entry at or very close to 7114, with a protective stop, say, 50 or 100 pips above that level. And, if triggered into the trade, we’d then suggest trailing the stop that same distance behind to limit risk and let profits run in the event the market begins moving in our favour.
As we said earlier, this is a rather high-risk trading opportunity, and one that’s not for the risk-averse. The significance of the all time highs, however, coupled with the prospects of being able to enter the market at the very onset of a potentially lengthy, medium-term reversal, may be reason enough for trying one’s hand here.
While run-of-the-mill trend trades are safer and carry a higher probability, reversal trades of this nature can be extremely lucrative in those (albeit rare) times when they do work out. Together, trend and reversal trades are a part of a balanced, long-term trading strategy, and for that reason, we encourage traders with a mind for risk to not shy away from reversal set-ups strictly because of the lower probability.
In this case, the all time highs mean there’s more room for price to run than ever before, making this prospective FTSE short set-up one that could make a trader’s entire quarter, if not year.
Any market trading at or near all time highs is sure to have the attention of retail and professional traders, as well as the big banks and institutions that participate in world equity and currency markets. As a result, traders can be sure that there will be a massive influx of sell orders at or very close to the key price level, which, in this case, is 7114 in the FTSE.
Very high volume at that level is likely to create plenty of volatility as well, and it could be an especially wild ride on shorter-term and intraday time frames. Longer-term traders, though, may choose higher time frames like the daily or even the weekly to dampen risk and decrease volatility.
Bear in mind that it could take a couple or even several tests of the all time highs for a decisive downward move to materialize, which means patience and perseverance may be required to ultimately get in on the proper side of this particular trading opportunity.
A special, video update was sent to Lazy Trader subscribers earlier in the week to inform and educate them about this opportunity. For priority access to timely trade ideas and analysis just like this, join The Lazy Trader member community. A no-risk trial subscription can be yours today simply by clicking the below banner.