How to profit from a spiky market

Knowing when a market will likely turn is like holding the key to a vault containing trading riches, says John C Burford.

Today I want to follow up the my coverage of GBP/USD from my 9 September post, because it will illustrate how you can make pretty accurate forecasts based on the simple principles of my tramline trading method. Knowledge of that method can help you plan good trade entries in advance.

In that post, I predicted that the rally going on at the time was likely a prelude to a tramline kiss. Now a tramline (or trendline) kiss is a very important event in my book and one of my favourite trade setups. Remember, my tramlines are always lines of support (lower tramline) and resistance (upper tramline). And when broken, they reverse roles.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Knowing when a market is likely to turn is like holding the key to a vault containing trading riches. If you can roughly pinpoint these turns, you are able to enter trade orders in advance that take advantage of this knowledge. And this kiss is one of the most reliable signposts for turns.

Below is the daily chart I showed back on 9 September. The blue lines are my major tramlines, and the lower line was emphatically broken on 20 August. That one event turned that tramline from a line of support into one of resistance. Previously, every attempt to break below this line was refused and the market bounced up. From late April, there were at least five such attempts and every time, the line held.

15-9-9-MWT-5

When you see a line holding after more than three attempts at breaking it, then you can put a lot of confidence that the line will continue to hold until it doesn't. If a breakdown does happen, it can be traded with high confidence.

Advertisement
Advertisement - Article continues below

The market dipped to the Fibonacci 62% support level with a slight overshoot. And that brings up a very important point with this market. Some markets are notorious for overshooting established support and resistance levels, particularly the normal Fibonacci levels. By the same token, other markets are not nearly so prone to this.

Cable is one of the most erratic markets going

As it happens, GBP/USD is one of the worst culprits, as you can establish from a study of the charts of all time scales. That is what makes cable a very tricky customer to trade with any precision and allowances must be made if trading it. For instance, wider than normal protective stops could be employed to give you a chance at staying with a promising trade.

Cable hit a snag, but it's still going down

15-9-21-MWT-2

It not only made it back to the lower tramline, but it overshot the kiss!

In fact, on two successive days the market traced out pigtails, and the body of the candles hardly penetrated above the tramline. Friday's key reversal (higher high and lower close) was a clue that the kiss may well hold.

15-9-21-MWT-3

A closer look at the hourly chart shows the rally is in a clear A-B-C, suggesting it is counter-trend and there is currently a large momentum divergence, indicating a weakening of buying power. That suggests that my kiss will likely hold.

But if you have shorted the market near the blue tramline, the overshoot of 50 100 points (depending on where you placed the tramline) could have you stopped out if your stop was a 'normal' one.

Advertisement
Advertisement - Article continues below

That little example would tell you that if you are trading in this manner, you had better use a wider stop or be prepared to get back in if stopped out on the first attempt. Naturally, that latter option is only available if you are able to monitor the markets on a regular basis throughout the day.

On Friday, the market spiked and then came down hard back below the blue tramline and created a key reversal. That was a good indication that the kiss was very likely in and the path of least resistance now is down.

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
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
Visit/519285/bettingon-politics-some-safe-labour-bets
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
Visit/518916/ds-smith-will-deliver
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
Visit/518908/betting-on-politics-28
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

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/520598/money-minute-thursday-16-january-a-batch-of-company-results
Economy

Money Minute Thursday 16 January: a batch of company results

Today's Money Minute looks ahead to results from a host of UK companies, plus the latest unemployment figures from the US.
15 Jan 2020