Within the trading environment, many strategies exist as a way to determine a path to profitability and many new market participants might be under the false impression that these trading strategies come with a 100% success rate, leaving the trader with no (or little) chance of realizing a loss.
As legendary money manager Peter Lynch once remarked:
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten“.
Today I want to have a look at 3 technical trading strategies that have a fairly high probability of success:
#1. The 200-Day Moving Average
On the trading desk chat forum last week we were having a discussion around trading strategies, using a recent example in Woolworths Holdings ($JSEWHL).
Using the long term chart, we had a look at the moving averages and how that would be a guide to whether a trader could either go long or short.
Going back to 05-Nov we see the share having peaked at R108 after appreciating from R79.35 one year prior. As a result of the weak Rand coupled with a high valuation, the priced started to decline. Here we saw the price crossing below it’s 200-day moving average, while the 50-day moving also crosses below this level.
This is commonly referred to as a “death cross” which is a long term sell signal. This occurred during the last week of January 2016 which subsequently saw a long term downward trend commence. During the second week of February 2018, we saw the opposite happen where we saw a “golden cross” occur – this being the long term buy signal.
While the new long term buy signal has triggered, we may see a consolidation around this level. The share will also have to overcome the downward trend line in place from the peak at R108 to reclaim the bull trend.
So, next time you open your charting package, don’t forget to add that 200-day moving average.
#2. Channel Support and Resistance
From time to time prices move in a defined range, attracting buyers and seller at key highs and lows. At times this occurs within a channel that could move in an upward, downward or sideways range.
Over the last two and half years, we have seen a perfect example of this with Curro Holdings, a share that has traded in a sideways to downward channel.
The top of the channel has created an opportunity to sell the share while the lower boundary of the channel could have been used to accumulate shares for a bullish move. These levels, along with other factors represent ideal opportunities for traders to participate in a high probability setup.
#3. Rising and Falling Wedge
This has to be one of my favourite setups, as they have such a high probability of success.
Recently we saw this with Nampak, where a falling wedge pattern had developed since the second week of January 2018. Upon an upside break of the wedge, we saw the price push higher, appreciating over 10% in 4 trading days.
Prior to this we saw a rising wedge develop from September to October 2017, which was followed by a resumption of the downward trend.
To participate in some of the trade ideas and strategies, please get in touch with our trading desk.
Here’s to profitable trading,
Trading Desk Analyst