How I took 450 pips out of the Dow this morning

In a trade that perfectly illustrates the low-stress nature of using his simple trading and money management rules, John C Burford takes a 450-pip profit from the Dow.

This afternoon I want to follow up Monday'spost on the Dow, since it perfectly illustrates the low-stress nature of trading with my very simple trading and money management rules.

I fervently believe that many traders trade emotionally, allowing themselves to be whipsawed one way and then the other by the news. That's something I observed at the recent MoneyWeek Trader workshops.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Not only that, but when you have a long position, say, and the news is suddenly bearish, there can be an urge to kill the trade and override any stop-loss policy you may have. You may even be tempted to reverse your original position.

Usually, this is a disastrous way to trade. And if the market continues going in your direction (without you), your confidence will be shattered. Your stress levels ramp up and you are in no state to make a rational analysis of the markets.

Advertisement - Article continues below

Also, it is so very tempting to follow the gurus and do what they say they are doing after all, they must have a lot more knowledge and skill than you, surely? These are the well-known and well-publicised names we are all familiar with.

When one guru tells you that gold is going to $5,000, you need to question whether that was what he or she actually said, whether it was heavily qualified (for example, "if gold can reach $3,000, it should make $5,000"), or whether they are engaging in ramping the price so as to sell their gold at higher prices.

With all of these questions, I treat what the gurus have to say with a pinch of salt. I suggest you do likewise.

When a losing trade is a good trade

OK back to the Dow. When I left it on Monday, I spotted the wedge formation that gave me pause for my bear position. This was the chart then:


(Click on image above for larger version)

I had my short position taken at the 13,500 area and had moved my protective stop to break-even.

Advertisement - Article continues below

I had wondered if the market would make another stab at the upper horizontal line again. After all, we are still in a major bull market on the daily chart. There was a very real possibility that investors would get the QE infinity bit between their teeth and push up shares to new highs.

But I was not concerned about it! If that did occur, I would be taken out of my trade with no loss. That was my worst case scenario.

I cannot over-emphasise how comfortable that made me feel! But imagine if you were just playing this trade by ear'! I guarantee that if the market rallied back to the 13,500 area, you would be in high-stress mode.

You might decide to over-ride your stop, or move it up higher to give the trade more room'.

I would advise anyone considering this approach to trading to either cease trading and give your trading account to charity (the same net result to you), or to get serious and have a rock-solid money management plan.

And one other point don't get hung up on your losses. We cannot predict the market with 100% accuracy. All traders even very successful ones have lots of losing trades. If you enter the trade following your rules and it loses money, it's still a good trade! That's because you showed discipline in adhering to your plan.

Advertisement - Article continues below

As we now know, the market did not make that rally attempt and here is the situation this morning:


(Click on image above for larger version)

On Tuesday, the market plunged down through the lower wedge line and solved my dilemma. This occurred despite generally bullish' reports from the US.

If you reacted to this news, you might take a long trade, or cut your shorts.

Always let the market decide!

Now, the market is working its way through the congestion zone support from September and is challenging the previous low just under 13,000 (pink bar).

Advertisement - Article continues below

So now I have a nice problem where to move my protect-profit stop?

The subject of stop-losses is a difficult area, and there are no hard-and-fast rules. But one major consideration is this: what is the timeframe of your trade? If you are taking a long timeframe, you will place wide stops. If trading short-term, you would use tighter stops.

So with this week's large declines, what does the daily chart look like? This was the picture on Monday:


(Click on image above for larger version)

I had my first major target at 13,000. This is the picture now:


(Click on image above for larger version)

Advertisement - Article continues below

That's nice. But, having hit my target, the market has also hit support at the Fibonacci 38% level. Hmmm. Time for a bounce, perhaps?

There may be a rally ahead

And gazing over to the gold chart (the Dow and gold trade roughly in sync), I see support coming in at the $1,700 area (see Wednesday's post). Another reason to suspect a rally ahead.

And here is another:


(Click on image above for larger version)

This is the higher-beta Nasdaq and it has collapsed to the Fibonacci 62% retrace, and is eating into major chart support.

Advertisement - Article continues below

If I were trading short-term, I would be looking at this level to take a tidy 450 pip-plus profit, of course. And that would be a textbook low-stress trade. My only real risk was at the start where I had my stop around 75 pips away.

The reward/risk ratio is over six-to-one a very high return. Most of my short-term successful trades are in the two or three-to-one range.

As it happened, this trade was never in debit as the market moved swiftly down after entry. Talk about low-stress!

Now, if you can find a way, using my very simple money management rules to reduce or eliminate stress, I am confident your performance will shoot up to the next level.

If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading Advanced tramline trading An introduction to Elliott wave theory Advanced trading with Elliott waves Trading with Fibonacci levels Trading with 'momentum' Putting it all together

Advertisement - Article continues below

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.



Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular


Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020

Money Minute Thursday 23 January: European interest rates

In today's Money Minute we look ahead to Christine Lagarde's second interest-rate-setting meeting at the European Central Bank.
23 Jan 2020

Money Minute Friday 24 January: the key to UK interest-rate cuts

Today's Money Minute looks ahead to the release of data that could hold the key to UK interest rates cuts. 
24 Jan 2020