Seeking Low Risk/High Prob trades

I started my Pro Shares service four years ago and at the start I was unsure whether my Tramline methods (Elliott waves, Fibs, Tramlines) would apply to individual share charts as they do to the broad indexes.  After all, individual share prices have often been severely affected by sudden announcements affecting that company or sector in particular.  That has often smashed the charts out of promising situations.

But I need not have worried – in the four years, I have picked out some terrific low risk/high reward opportunities, especially recently.

For instance, the news of the pandemic around March was a blow to the airlines as they faced the prospect of almost total disruption to the their operations.  Naturally, this was a great ‘reason’ for the shares to be sold hard.  And they were.  But as the general market stabilised at very low levels in the summer, I spotted a low risk/high reward opportunity.

I cannot emphasise enough the need to seek out low risk/high reward set-ups.  When I enter a trade, I must judge the initial risk to be low – I rarely advise ‘chasing’ a strong trend.  Instead, I wait for a pull-back – usually to a Fibonacci level, and/or a trendline (or tramline) – and that is where my Tramline methods prove so useful.

That is where I can set a reasonable stop loss for protection in case I am wrong.  I will never ever carry a losing position that goes beyond my pre-determined stop.  Traders/investors that do so usually have short trading/investing lives. I prefer to be stopped out and take my allowed-for loss and to sit calmly on the sidelines and re-assess.  I believe that is the best option for most.

Here is a great example in International Consolidated Airlines (the owner of British Airways).  In my weekly Chart of the Week (COTW) for Interactive Investor, I had this as a tip on the accompanying video (I encourage all to sign up for these from ii.co.uk).

As I tracked the Corona Crash disaster from late January, I noted the sharp rally into the June high (my wave 4) as investors believed that at £2, the lows had been reached.  After all, a huge decline off the £7 high just a few months previously surely discounted the loss of business from the pandemic. Positive thoughts were then turning to a rapid economic rebound as new cases/deaths were far lower than predicted and a vaccine was likely arriving soon.

But I resisted buying there as my Elliott wave analysis suggested one more new low lay ahead.  And sure enough, poor earnings reports in the summer was enough to halve the share price to the sub-£1 low in early October.  Those buying at £2 saw the shares lose 60%.  Ouch!

And with the huge momentum divergence and a potentially complete five wave descent, there was a superb low risk/high reward set-up before us.

My initial target from the £1 level was the gap closure at around £1.50 – which was hit this week for a superb 50% gain.  

For those hot share chasers, you would need a surge to $900 from the current $600 to achieve the same profit.  Hmm.

That is why I like to uncover opportunities when solid companies (with an actual earnings history, unlike many of today’s IPOs) have fallen on hard times.  The downside risks can be v ery low indeed – but with the right timing, of course.  I have a Buy Low/Sell HIgh list for COTW.

And for Pro Shares members, I spotted a very similar set-up in BT Group.  Yes, I know this must be one of the most boring shares in the LSE!  It  certainly does not match Tesla for excitement. But ssk yourself – are you trading/investing for kicks/kudos or for profit? If the former, you are gambling. 

These ‘boring’ old-school shares can present superb low risk trading opportunities. And it certainly did recently when I spotted this set-up

It was trading quietly around the £2.10 area late last year.  But sentiment had turned very bearish especially from January – well before the pandemic had affected many other shares. 

But from the late March low, I noted it was trading slightly downward but with highly overlapping sub-waves and that told me a major bottom was likely forming especially with the huge momentum divergence building.

With the downside risk low, we went in at £1 last month (with stop at 95p) and my analysis was confirmed when the market surged above the upper blue trendline.  Yesterday it hit a major target and I advised members to take at least some profit for a tidy 30% profit.  There may be more but with the closing of the gap, it was prudent to act.

And here is another similar set-up in Micro Focus International – a former tech high-flyer that had fallen on very hard times

From the July 2019 high at £23, it had collapsed to a low around £2 and was therefore a member of my ‘90% Club’.  This was the chart I presented to Pro Share members in late November and it shows the usual signs a major low was in.  We have a complete five down with a huge momentum divergence – a big green light for a major reversal.

Last week it hit my first target at the wave 4 high at £5.  Next target is the £8 region to close the gap.

Trade the chart, not the story

All of the above is a demonstration that you are not trading a ‘story’ but the chart.  What do I mean by this?  Tesla has a great following – it is usually the most active share trading daily. It attracts the teenage Robinhood players who believe the share will fly to the moon and make them rich (despite an eyebrow-raising P/E over 150).  Trading BT is not for them.

Consider this – take away the name (and price scale) on your chart and you may well be hard pressed to identify it.  Is that a Lloyds chart or is it NY Cocoa?  Many more follow Lloyds than do Cocoa, but the profit opportunities are the same.  My advice to anyone who is married to a share or an index (such as the Dow) – consider a separation where you live apart but stay on friendly terms.  Meet others (in a Covid-compliant way, of course).

Gazing at a new chart can sometimes immediately reveal a set-up that is ripe for exploitation.  I regularly open up charts of shares of which I have no idea what the company does (especially if tech). 

Of course, I am practicing technical trading where all I need is the charts, my Tramline method of analysis and an estimate of the state of sentiment.  Any popular story around it can be interesting but I usually look for a reason to trade against it.  I know that when everyone believes something is true, the world eventually proves otherwise.

Everyone now believes electric vehicles are ‘green’ in that they produce low/no pollution or greenhouse gases. They are saving the planet!  Who doesn’t want to do that? But a careful economic analysis of the manufacturing process of the cars and batteries has demonstrated that in fact, there is nothing ‘green’ about the industry at all.

In the same way, it is popular to believe the enormous mountains of debt being created will have no adverse consequences (The Modern Monetary Theory). In fact, all empires and bullish economic trends have been brought down by too much debt.  We got a flavour of that twelve years ago in the Credit Crunch when the Dow lost over 50%.  That was a trailer to what will be a much larger main feature.

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We are running bull campaigns in several Commodity markets that should extend our gains.  If you wish to join us, take a two week Free Trial to my VIP TRADERS CLUB where we trade stock indexes, currencies, gold, crude oil, coffee. cocoa and many more. 

Or take a generous three week Free Trial to my PRO SHARES service where we are currently trading several bombed-out shares including BP. BT, Centrica, Greggs, and more that are in great profit already..

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NY Cocoa hots up again

And talking of NY Cocoa – we have been trading it for VIP Traders Club after it gave me a great bull signal earlier this year.  And since the high in late November, it has corrected in a fourth wave that I had forecast to members after taking major profits on our longs.

Last week it hit the Fib 50% retrace and also chart support (from the October high) at the 2530 area. As it hit it, note the large momentum divergence that should herald a major advance in wave 5.

Another great example of using the Fib levels during corrections that has given us a low risk/high prob trade.  And my EW analysis has set the decline as a fourth wave, leading to new highs in wave 5.