Using ‘tramline trading’ to profit from market volatility

I covered the FTSE 100 market action in a recent post which covered the first period of post-Japan earthquake trading. I showed that the move up from the summer was well contained within my tramline pair I had drawn weeks ago.

The rally I could count as complete in five Elliott waves at the 6,100 top made in February. I then suggested that the most likely move would be down in a change of trend, having completed a classic five-wave impulse pattern.

The market did indeed move down to toy with my lower tramline, before plunging starting in early March (this was well before the Japan crisis, please note) towards my third tramline, which I had drawn parallel and equidistant from the two original tramlines.

Here is that same chart updated to this morning:

FTSE 100 spread betting chart

(Click on the chart for a larger version)

Since my previous post, the market has indeed plunged very rapidly to my lowest tramline (remember, it was drawn long before the market hit it!) – and then overshot it before bouncing back.

This ‘overshoot’ effect is very common when markets are in free-fall (or free-rise!), and I fully expected it here.

When a trend changes, hunt for new tramlines

But here is the interesting point – when a market changes trend, it is a good idea to look for tramlines in the new down trend. And this is what I find in the hourly chart:

FTSE 100 spread betting chart

(Click on the chart for a larger version)
My upper down-sloping tramline I could draw a couple of days ago, which I did.

To find a valid lower tramline, I used my parallel line tool on my spread betting platform and hovered over the small high made on 1 March.

Lo and behold, it passed right through the first drop to the 5,600 level made last Tuesday. That was my second tramline in place.

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The market bounced from the 5,600 level, then fell again – right to my new lower tramline and beyond – in another ‘overshoot’.

Of course, for short-term traders, this was a golden opportunity to take profits on their short trades. The odds then heavily favoured a significant bounce, especially now that momentum was so oversold (marked in the purple box).

As I write, we are seeing that good bounce. An ideal target is, of course, near the upper down-sloping tramline, as this is the operative set at present, while the market is in a broader downtrend.

But the market is hovering around my lower up-sloping tramline, and if this is still a force, the market may not rally too far from it.

We are living in volatile times, which means the trading opportunities are coming at us much more rapidly. If you are a trader, you need to be on your toes, as the swings are becoming wilder.

But using my tramline trading ideas, combined with Elliott wave, Fibonacci, and momentum indicators, it is possible to extract profits from these moves. I hope I am showing you how.

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