Tim Walker
Tim Walker

ABC trading is a trend following system. That means that when the trend is up (defined by higher swing tops and bottoms) we look for long trades, and when the trend is down (defined by lower swing tops and bottoms) we take short trades. When the trend is uncertain, that is, not clearly up or down, the safest course of action is to stand aside.

While this is certainly true of ABC trades using the 1-day swing chart, it is equally applicable on a large picture scale as well. This is an important scenario to be aware of. Take a look at the chart below of Soybeans futures.

Chart 1 – ABC Trades on Soybeans

click chart to enlarge

Here you can see every ABC long and short trade so far this year. There have been plenty of them. But if you go through and analyse them, very few of them generated any profits.

Now take a look at the same chart, and instead of the ABC hi-lites, let’s look at the significant tops and bottoms.

Chart 2 – Tops and Bottoms on Soybeans

click chart to enlarge

As you can see, this market has been largely range-bound since the high of the year in early February, and there has been no clear pattern of either higher or lower tops and bottoms. This is applying the same technique used to identify ABC trades, but in this case to see the overall trend of the market.

The beauty of the commodity markets is that there is always at least one that is making a good trend. So while Soybeans has been in the doldrums, look what Gold has been doing over the same period.

Chart 3 – Gold in 2011

click chart to enlarge

When trading, don’t make the job any more difficult than it needs to be. If your chosen market is stuck in a sideways trend, either find another one or take a break for a while. It is always good in any case to step back and allow your head and emotions to clear. But the one thing you must not do is forget about your market altogether. Every sideways market will resolve eventually and a new trend will begin.

Chart 4 – Soybeans in 2010

click chart to enlarge

Considering Soybeans again, this time for 2010, notice that a lengthy sideways period, which had lasted a whole year, ended when a double bottom formed on 1 July. If you take the trouble to look at the chart further back, you will find that this was the 2nd anniversary of the all-time high on 3 July 2008. There were plenty of opportunities for profitable trading in the bull market which followed, but you could easily have missed them if you stopped watching.

So pay attention to the simple but important signals – anniversaries, chart formations such as double tops and bottoms, and even simple support levels. If you are following Soybeans now you would watch the high and low points of the year from Chart 2. A breakout of either of those will signal the next big move.

When Gann wrote about sideways moves on stocks, he said the following, which is equally applicable to commodities:

Before any stock, or group of stocks, starts on a big advance or decline, a long period of time is required for preparation, or accumulation or distribution. It requires time to prepare and lay the foundation for a building. The larger the building, the more time required to construct the foundation. It is the same with stocks. The greater the advance or the decline, the more time required in preparing for it. (Truth of the Stock Tape, p.103)

We may take a holiday from the market, but the market never sleeps!

Knowledge is Power!

Tim Walker