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Trading
April is a fool's paradise
Jeff Cartridge - April 9, 2008
Any fool can make money in a bull market, and April is one of the best times of the year to appear foolish. The chart below shows the Australian markets seasonal tendencies. The All ordinaries Index, XAO has a tendency to rise strongly through April each year.
So what is the trading opportunity here in April, taking a look at the following statistics:
|
Day 1 - 30 |
Day 6 - 20 |
Entry 1st high exit trough |
| HR |
81% |
88% |
71% |
| Avg gain |
2.67% |
2.27% |
2.79% |
| Avg win |
4.00% |
2.95% |
4.26% |
| Stop level |
1.50% |
1.50% |
1.50% |
| Risk/reward |
2.67 |
1.96 |
2.84 |
The table above shows that the average gain for the month is 2.67% with a hit rate of 81%. This means that the market is higher 8 out of 10 times during the month of April and if this gain continued throughout the year the annualised returns would be 32.0%. This shows the month is very strong overall. The strongest April delivered a gain of 14.0%
From further study of the data it becomes clear that the beginning of April can make you look like a fool as the start of April is often weak. The market falls for the first few days before taking off later in the month. Historically the strongest part of the month is the 6th – 20th April, with the market higher 88% of the time and a return of 2.27% would be an annualised return of 54% per annum. The strongest gain during this sweet spot delivered a gain of 12.2%.
This seasonal strength in April can lead to many trading opportunities. Consider trading the XJO index with Futures, Options or CFDs. An entry could be taken when the market breaks above a previous high, signalling a turn from the beginning of April. All figures quoted exclude any leverage that may be employed. An initial stop should be set to control risk at around1.5%, but under no circumstances should this stop be less than 1 ATR of the current price.
Provided the trade moves in to profit an exit can be taken when the index drops below its previous trough. As a new trough is formed the stop is moved up to the lowest price reached during the pull back.
Following this strategy means the April trade has at some times extended into May as the market continued to rise. With an average gain of 2.79% and a hit rate of 71% this trading strategy is a profitable way to exploit the April strength. The maximum return from this strategy was seen in 1997 with a gain of 14.31%.
The return to a trader will depend on the amount of capital placed at risk. The average winning trade returns 4.26%. Based on a stop loss of 1.5% this presents a risk reward ratio of 2.84. For every $1000 at risk on the trade the average return is $2840. Leverage using CFDs or Options will alter your return on investment, but does not alter the risk reward of this trade.
Over 10 years of trading, risking $1000 each time the strategy would lose 3 times, -$3,000 and win 7 times, $19,880 for a total profit of $16,880.
The IT sector, Healthcare and Consumer Staples sectors are currently out performing the market. Current strength can be seen in the Financial sector as the start of a recovery is apparent from its recent sharp fall. Both the Materials and Energy sectors are also outperforming the market, however sharp falls in commodity prices after recent big rises could hurt these sectors in the short term. Trading the strongest sectors with CFDs or selecting shares in these sectors is another way to profit from the seasonal strength in April.
Will the market be higher in April this year? I would be a fool to answer that question for certain as past performance is no guarantee of future performance. On the other hand I would be a fool not to be in a position to take advantage of the rally if it does materialise.
Jeff Cartridge is the author of Supercharge Your Trading with CFDs. For more information go to www.superchargedreturns.com.au. Please note that the views expressed here are those of the author, not of CompareShares. Although all investing has some form of risk, CFD trading strategies are only for experienced traders and risk management strategies must be considered.
More articles from this edition of CompareShares:
Investing: Story of a long-term investor - Kerrie Brown
Investing: Why inflation is bad for your wealth
Stocks: Aussie stocks exposed to gold bull run
Trading: April is a fool's paradise
Expert Panel (warrants): Why are gold and crude oil prices going up?
Opes Prime: Opes administrators find linchpin firm in Virgin Islands
US: Alan Greenspan says US is in recession
Opes Prime: Opes investors dismayed by collapse
Companies: BHP shares surge on Chinese rumours
Sub-prime: Credit market turmoil persists, says IMF
Whatever your views, you can discuss this article - or any of Jeff's articles - on our message board Your 2 Cents.
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