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Trading
April Makes a Fool out of Traders
Jeff Cartridge - May 19, 2008
 At the beginning of April I published an article that stated that I expected to see a strong rally in the markets during the month of April. The rally did materialize with the ASX 200 starting the month at 5355 and finishing at 5595 for a gain of 240 points or 4.48% for the month. This was slightly better than the average winning month which typically adds 4.0% in April. Despite this rally, it was not an easy trade.
April got off to a strong start with a break out of a small consolidation range on the 2nd April following a strong lead from the US markets overnight. This rally continued for a few days before experiencing a strong pull back. The drop retraced the full amount of the initial move to below the level at the start of the month. The market then recovered and started to move higher. There were a couple of weak days during the climb higher, but overall the market was higher for the month. With hindsight there would appear to be an easy trade to make money in April. The forecast I made at the start of April was correct, but events conspired to make it a more difficult trade than it should have been.
There were three possible scenarios suggested in my article at the beginning of April based on historical information.
Strategy 1
Buy on open of the 1st April and hold until the close on the 30th April. This strategy would have delivered the results outlined above, however a strategy is not complete without some form of risk management.
A stop placed below the low on 1st of April would have not been triggered by the pull back, but if this stop was raised during the first rally to breakeven, the stop would have been triggered, for zero gain.
Worse than this adding to the position as it moved higher by pyramiding into the trade, requires that the stop is moved higher to maintain the same level of risk. In this case the first position is stopped out for a zero gain, while the second position is stopped out for a loss.
Both of these approaches which are designed to improve the results for the trade actually worked against it during the month, while the underlying strategy was profitable.
Strategy 2
In the article I identified the “sweet spot” for the month was the 6th April to the 20th April presenting a possible trading opportunity. This year the 6th April was a Sunday so an entry could have been taken on the 7th April at 5619. The 20th this year was a Sunday as well, so an exit could have been taken on the close of the 21st at 5600. This results in a small loss for the month and this particular strategy loses money in April 2008.
The buy point could not have been timed much worse this year and any reasonable stop loss would have been triggered ensuring a loss for the month.
Strategy 3
This strategy outlined a specific entry and exit technique for the month, buying as the market broke through the previous day’s high and exiting when the market broke below a new daily trough.
The entry came on 2 April at 5374. One note of caution for new traders to the ASX200 is that most of the trading instruments are based on the futures contract, known as the SPI, not the cash market displayed here. The SPI trades overnight while the Australian market is closed and the entry happened on the night of the 1st April. The trade started out well with a stop sitting below the entry level at 5299. This level for the stop is based on support levels on the price chart and also coincides well with a 1.5% stop loss and the current daily ATR of the index.
The first market pullback did not form a new low on the daily chart, so all the profit made on the initial move would be eliminated. This is not an easy thing to watch all your profit disappear; however if the initial stop remained in place the trade would have been held through this drop.
Any movement of the initial stop to breakeven or any attempt to pyramid into the trade would result in being exited from the trade at this point. This is what happened to my position.
An alternative exit could have been used utilising some form of trailing stop that may have locked in some of the initial gain. All this is possible in hindsight, but not so easy to do at the time.
Even though I was stopped out of the position this did not stop me from re entering the trade using the same entry strategy as before. This new entry was on the 16th April.
From here the trade became much easier as the market moved higher day by day with minimal pull backs and the profit was locked in by raising the stop to the new troughs as they formed. An exit from the trade occurred at 5556 on the 30 April as the market triggered the profit taking stop. Following the third trading strategy outlined in the April article would have resulted in a gain of 182 points or 3.4% for the month. Note the figures quoted here do not include the cost of brokerage, the spread or any leverage that may be employed by a trader.
April did deliver on its promise of strong returns to traders, but small changes to the strategy made a significant difference to the results that a trader would have received during the month. As always the markets can very easily make a trader look foolish.
So how does May look based on historical figures. The market is higher in May 65% of the time, but the average gain is only 0.28%. There is no strong trading opportunity apparent in May and it is most likely that the market will consolidate the strong gain seen during April this year.
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.
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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Trading: April Makes a Fool out of Traders
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Market Reports: Top Ten CFD stocks for the week
Finance: Stevens' speech sparks rate rise talk
Companies: Fortescue wants to stay Australian
Finance: Westpac says Gail Kelly a 'great asset'
Sub-Prime: Crisis end getting closer: Deutsche CEO
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