Sometimes the simplest things in life can be the best. And that is especially true for successful stock trading too. You won’t hear many people in the City say this, but the fact is that you really don’t need to be a rocket-scientist to make money. Often a simple and well executed system is all you need to make very healthy returns.
Today I want to show you one of the easiest trading systems you’ll come across.
With the FTSE 100 seemingly range-bound there may be a great opportunity for a simple, but cracking trade…
Make money even as the FTSE goes nowhere
About ten weeks ago, we noted that the market looked like it was struggling in a tug-o-war. On the one side Mervyn King and his free money is tugging the FTSE in one direction, while on the other, a negative economy seems determined to drag her down.
The net result – the FTSE has been yo-yoing around the 6000 mark, seemingly unable to break one way or the other.
And when you see a regular pattern like this yo-yoing of the market, you can often trade it for profits. The good news is that you don’t need to be a sophisticated technical trader to exploit this situation…
The beauty in patterns
I’m about to show you a chart of the FTSE 100 over the last three months. You’ll notice that it’s a little different from the standard chart you normally see. That’s because most charts plot the closing price for a stock, or index. But if you’re trading, the closing price isn’t necessarily the one you’re interested in.
This is an HL, or ‘high-low’ chart. As its name suggests, it shows the high and the low that the FTSE made on each day. That’s incredibly useful. A lot can happen in between the open and the closing bell – you can’t afford to ignore it!
Because the market keeps bouncing around the 6,000 level, I’ve taken 50 points either side of this key level and drawn two tramlines. I’m going to use them as the basis of my trading strategy.
FTSE 100 three-month ‘HL’ chart
The idea is that you buy the FTSE 100 when it hits the lower tramline (red circles) and then you sell as it hits the upper tramline (green circles). In this example, I’m looking to make 100 points every time we trade in and out by buying at 5,950 and selling at 6,050.
So if you play this one on a spreadbet, you may want to put on £10 a point. That should give you a profit of £1,000 each time you successfully trade in and out.
And don’t worry about having to keep glued to a trading monitor. You don’t have to. Simply place your ‘open order’ to buy at 5950 in advance. If the FTSE dips down to that level, your trade will be opened for you. Just make sure that your order is ‘good until cancelled’ – else you’ll find that your order disappears from the system after a certain amount of time. And when you’re ‘opened’, you place your ‘order to sell’ at 6,050. Again, make sure it’s ‘good until cancelled’.
Of course this all looks easy with the benefit of hindsight. But if you’d played this trade in reality, there would have been some hairy moments.
Let’s say you had spotted this pattern in early January – you may have opened your position at point A.
But – horror of horrors – after you opened at 5,950, within a week the FTSE hit an intra-day low of 5,820 (point B on the chart). A spreadbetof £10 a point, would have left your account nursing a deficit of £1,300 (5,950-5,820 = 130 points x £10 = £1,300). Not pleasant…
But then within a few days, not only had this paper deficit reversed, but you’d have closed out with your £1,000 profit banked (point C on the chart). Obviously this isn’t a game for the faint-hearted.
This strategy is highly dependent on the market sticking to its trading range. So the question is: is this still a good bet? Is the FTSE 100 likely to keep bouncing around the 6,000 level?
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It’s looking good to me
The FTSE 100 still looks range-bound to me. The tug-o-war is turning into a real battle of attrition.
On many metrics the market looks fair value (I struggle to say cheap) and let’s face it there aren’t many attractive places to put your cash right now. And with so much of the FTSE 100 in resources and energy stocks, you could argue that it’s got a reasonable tailwind behind it.
But then again, there are a lot of negatives out there too – I’ve not hidden my reservations on the state of the UK economy. And anyway, cheap things can always get cheaper.
There’ll be good news and bad news on the economy in the months to come – the FTSE trading sideways looks about right.
And with global instability causing tetchiness and excitement, we’ll have some volatility on our side. That’s going to help the market keep up its yo-yo mojo…
A note on stop losses
I don’t want you to get involved in this sort of trading strategy unless you’re prepared to lose too…
And if you’d like to give it a go, you don’t have to bet £10 a point – why not 50p a point? That way, hopefully we’ll be able to build up some profits that may be able to finance some larger trades.
As I outlined earlier, if your trade gets opened, you may face some losses – and that means you have to set your stop-loss at a realistic level. How much can you afford to lose? My advice is to set your stop loss at 150 points. That would have covered you for a pull-back like the one we had towards the end of January.
If the market falls to 5800 and your stop-loss gets hit, you’ll lose £75 on a 50p a point bet. That’s 150 points times £0.5 per point.
As I write, the market is bang on my opening position… anything below 5,950 is a buy.
PS Next week – we’ll get a bit more technical and we’ll look at how to refine our approach. Please note, I’m not saying this will necessarily make the system better – but we can refine it by using some more ‘technical’ tools.
A system is only good for as long as it works – it doesn’t matter how clever it is. Once it stops working, it stops working regardless of how simple or clever it is.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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