Mathew Barnes
Mathew Barnes

When David Bowden first created Safety in the Market, he considered calling the company something like “Staying Alive”, because like “Safety”, he believed survival was the most important thing for a new trader to focus on. He said if you can manage to “stay alive” as a trader, then you have a chance of learning the craft and being successful.

I have heard statistics that say 90% of traders either lose money or don’t make any money. At first I thought that figure was incredibly high but after several years of teaching students I realised it is probably accurate. The reason 90% of traders fail is that they come in, don’t know how to trade, don’t put in a lot of work, have poor money management skills, lose money and then quit, assuming that the problem is not them, it is someone else.

The ones who make money trading are those who learn to manage risk and their emotions.

Trading is not about making a million dollars in your first six weeks, nor is it about getting to the stage where you have ‘made it’ and can call every yearly top and bottom for the rest of your life.

I called my first yearly top in 2007 and since then I have called and traded other major turns. I have also been wrong in other forecasts (just ask Zipper!). Even W.D. Gann, who was probably the greatest trader of the 20th century, only had a 90% success rate, even with his skill level.

This month, I am going to take you through an example of a market that has been enticing me for about nine months, the Euro Bund (FGBL-Spotv in ProfitSource). This is a detailed analysis, so grab a cup of tea or coffee, open ProfitSource and follow along.

I began stalking the Euro Bund in September, 2011. In Chart 1 below, you can see that the Bund was at an All Time High:

Chart 1

click chart to enlarge

I have previously written several articles on the big picture structure of this market and I won’t go into all of them here, as this article is about money management and “staying alive”. However, in Chart 2 below, I have marked three major ranges I would like you to consider with the ABC Pressure Points Tool:

Chart 2

click chart to enlarge

The activity here is to apply the ABC Pressure Points on each of the big picture ABC setups marked above. For those who have not been to an Interactive Trading Workshop yet, this is a ‘four click’ process:

Left click on the ABC Pressure Points Tool (in your Drawing Tools in ProfitSource), then left click on the A1, then left click on B1 and finally, left click on C1. Then, repeat the process using A2, B2 and C2 as your anchor points, etc.

If you are not familiar with the major ranges on the Euro Bund, I would encourage you to complete this activity before reading on, so you can have an idea as to one of the reasons I thought this was a major top.

Now let’s zoom in to the small picture. On September 23, 2011 there was a nice Outside Reversal Signal Day, on a Time by Degrees date, beginning what I thought would be a massive correction in the Euro Bund. This signal day is shown in Chart 3, below:

Chart 3

click chart to enlarge

We had what appeared to be a false break of Double Tops and a nice ‘Short the Closers’ at the end of the day. In reality, the market ran down and made a Double Bottom in October, as shown in Chart 4 below:

Chart 4

click chart to enlarge

The fact that this bear market failed so quickly and found support on the Double Bottoms was a good indication that the final top was not in place – yet. (The best lesson I have seen on reading a market with swing charts is the ‘Swiss Franc’ lesson in David Bowden’s Master Forecasting Course).

So in reality, the September top was not the final top, and the diagnosis was wrong. Could you have made money trading out of this top and if so, how would you have managed the trade?

Let’s move forward now to the November top. This top came in on November 10 and played out on the small picture almost EXACTLY as I had thought. I was sure I was on a winner here! This setup is shown in Chart 5 below:

Chart 5

click chart to enlarge

Let’s see how it played out in Chart 6 below:

Chart 6

click chart to enlarge

We had three very good downswings before the market found support on those old Double Bottoms, this time forming a potential Triple Bottom.

The Euro Bund eventually climbed up and broke through this top - as we will see in a moment - so we are dealing with another top that wasn’t to be. Two tops, no final top. Wrong again.

The same question applies - even though this was not the final top we were looking for, could we have made money from this top and how would we have traded it?

Fast forward a couple of months now to January 13, 2012. Another potential top was in place and this one was looking the best of the three! The January top is shown in Chart 7 below:

Chart 7

click chart to enlarge

This top came in on my Dad’s birthday (a sign from the market, I thought!) and had all the hallmarks of a final top. There were certainly some nice down days coming out of this top, which made for some exciting trading, but this top gave itself away as not being the final top, as shown in Chart 8 below. Before you continue reading, can you see what this market did to show traders it was not the final top?

Chart 8

click chart to enlarge

I’ve given you a bit of a hint here – the weekly swing chart couldn’t reach the 100% milestone of its First Range Out.

As much as I wanted to believe the January 13 top was the final top, I knew there was more upside (and more frustration) to come. Another failed top (spare a thought for poor old me) but the same question applied – could money have been made here and if so, how?

There was another potential top in March, from which we saw a sharp four-day fall, a potential turn mid-April that didn’t give a signal to trade and a small Double Top in April that really didn’t ‘feel’ like the top. (At this point I would encourage students to continue on from the January top and, using your swing charts, determine how you could have traded safely).

The Euro Bund 2011 setup is the best looking setup I have ever seen for a market top. However, so far the massive bear market I was (and am) expecting has not occurred.

The lesson here is that no matter how good the setup looks, you must always use stops and always manage your risk. Because I applied Money Management and traded with swing charts, I am STILL ALIVE as a trader to tackle the next opportunity and even better, I have made some small profits at most of the false tops along the way.

The fourth Platinum Assignment includes an excellent question in which students are asked to analyse a series of Time by Degrees trades and write down how they would have entered and managed the trade. This is a great exercise to apply to these tops on the Euro Bund, to see how you would have managed the trade and if you would have made a profit or loss on each example.

This brings us to the current market setup. In Chart 9 below I am using the FGBL-2012.M chart, which is the June, 2012 Futures Contract:

Chart 9

click chart to enlarge

It is interesting to note that the market is sitting around the 200% milestone of the February and March Double Bottoms.

The middle of May is presenting itself as an important place to watch on a number of currency markets (including the Bund), so if we get a nice looking Overbalance in Price short trade out of this area, it would certainly grab my attention.

Students of David’s Master Forecasting Course would do well to apply the Rating the Market lesson to the November, 2011 top and work out from there if they can see why May looks important.

Remember, if you want to make it as a trader, the first rule is to “stay live!”

Be Prepared!

Mathew Barnes