In my new book Tramline Trading, I describe my tramline trading method and explain how I use it to analyse the markets – and to help identify high probability/low-risk swing trades using my tramline system in partnership with Fibonacci levels and basic Elliott Wave concepts.
My guiding principle is to keep it simple and to that end, I use only one indicator – the basic 12-period momentum.
I believe that almost everything a swing trader needs to know is what is provided by the price charts. The news flow and economic data reports are peripheral influences and I use them mainly as contrary indicators, based upon the expectations of the majority.
If market sentiment is very bullish, I look for market tops (and vice versa).
In swing trading, my goal is to look for the price path of least resistance and ride it until it exhausts, and a new path takes over.
In Chapter 4, I list my five favourite trade setups:
1. The A-B-C setup
2. The tramline break and kiss
3. The Fibonacci 62% retrace
4. The tramline bounce
5. The third wave
The basic idea behind tramlines is that markets will often travel between two parallel lines: the upper tramline joining the highs and the lower tramline joining the lows. In other words, markets travel in a trading channel and the task is to find the appropriate tramlines. This is a current example.
The Gold Trade
As I write on 26 August, there is a terrific example of a tramline bounce (number 4) and a tramline break (number 2) in gold. Let me explain.
Here is the daily gold chart showing the eight-month tramline from the December 2013 low:
Gold has been in a giant triangle for over a year with the lettered waves getting smaller and smaller. Now, the market has bounced off the tramline and is heading up.
A long trade was indicated as the market hit that tramline.
Now, let’s examine the shorter-term chart on the hourly:
I have drawn in a reliable tramline pair with the lower line sporting a terrific PPP (Prior Pivot Point) and multiple touch points. I placed this line visually – and that is all you need to do when finding tramlines. There is no complex math involved at all. This is a purely visual method.
The upper line is parallel and passes across the multiple highs on the way down. At no point did the market trade above the upper tramline, which by definition is a strong line of resistance. But all lines of resistance eventually fail – and that is when a swing trade can be entered.
A few hours ago, the market broke sharply above the upper tramline and provided a buy signal on the break. The short-term trend has changed.
So I have two buy signals for a trade in the same price region: one from the daily chart and one from the hourly chart.
I am now long gold and to protect any further gains, I will move my protective stop to break-even in due course.