Over 40 years’ heritage
185,800 clients worldwide
Over 15,000 markets

Day one: trading the Australia 200

Potential strategy: going long Australia 200 cash when the technical picture becomes more compelling.

The ASX 200 is in a multi-week downtrend. However, there are a number of factors which suggest we may see better times ahead in the short term.

Given the current trend action many traders will be looking at selling any rallies in the index, however in the short term I will be looking at long positions, but I need to see more positive price action before taking a position.

Looking at the MACD (on the daily chart) shows the signal line firmly below MACD, and I want to wait until the signal line crosses back above the MACD to buy. Interestingly, we have already seen this set-up on the four hour chart.

The MACD is one of the best momentum indicators around.

History shows my idea results in a positive skew, and since the beginning of 2012 had you bought the index on the aforementioned variables you would have placed nineteen trades, with 50% of these profitable. The key here though is the money made on the winning trades was on average 2.4 times more than the money lost on the losing trades. Thus, had we started with $100,000 we would be up 16.3%.

Textbook theory would suggest traders could buy (or go long) when the MACD actually crosses above the zero line, however the quants suggest this is a less profitable strategy. Since the start of 2012 (again using the same parameters as above, but including the variable that the MACD needs to be above zero), we would have placed twelve trades, of which 33% would have been profitable. Importantly we would have only made 1%, thus it seems it pays to be aggressive with this indicator.

I also want to see the stochastic indicators printing a higher high, which would mean a move above 16. So this is another indicator incorporated in my strategy.

Traditionally the ASX 200 rallies from this week, so seasonality really could help this trade and we could see the so-called ‘Santa Claus’ rally take form.

Perhaps the biggest risk this week will be the FOMC meeting (Thursday morning at 06:00). My personal feeling is that the Fed will hold off until the New Year to cut the pace of its bond buying program (QE3), which could be positive for risk assets like equities.

So all-in-all I am looking at a long position on the Australia 200 cash, based on seasonality and the strong performance historically of this set-up. However, I need to see confirmation in certain indicators before I take action.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.