Exchange Trade Warrants
- Part 4
- Part 4
Trade Entry and Exit
Last week's article finished on warrant selection with an explanation of how to select an appropriate warrant based on exercise price and expiry date. Once the appropriate warrant has been selected the Warrant Trader will sit back and wait for the entry signal from the underlying share. The following chart shows the day that NAB broke away from $20 (Ie. - NAB has closed above and is trading above $20) and the corresponding chart for NABWBD showing an entry price of 40 cents.
Once the entry has been signaled the Warrant Trader will direct his attention to the bids and asks in the 'Depth of Market' for the warrant. The size of the existing bids and asks in the market will dictate the size of the trade. Liquidity is an ever present problem with warrant trading and it pays to trade parcels that are no larger than those being traded by other Warrant Traders and the Warrant Issuer/Market Maker.
‘Keep your eye on the ball’ is a good idea with warrant trading as the target price of $23.50 was achieved on an intraday basis. (See the chart at the top of page 4) When the exit was signaled by NAB, our chosen warrant had a corresponding exit price of 70 cents. Note that we don't wait for a close above $23.50…as any delay is costly.
Following the Trend
It can be argued that an exit at this point is premature with NAB and the broad market in established upward trends. But if a trader ignores this exit then he or she is breaking their own trading rules. This warrant has served its purpose well with a return to the trader of 75% in 1 month. To continue trading this warrant will lead to liquidity problems and reduced leverage. Unlike share trading, a Warrant Trader must use their predetermined target exit levels and not “Let your profits run”, as it doesn't apply to warrants. To follow the trend the warrant trader should ‘Roll Up’ through a series of warrants with progressive exercise prices. Choose a warrant that is just ‘Out of the Money’ and has at least 3 months to expiry and no more than 6 months to expiry. Roll up to the next warrant when the current warrant has moved just beyond ‘At the Money’. If there are no appropriate warrants to trade then it is highly advisable to abandon the trend altogether and go shopping for other opportunities. This is often the case. The Guppy Multiple Moving Averages are used to monitor the progression of a trend and time pullbacks for improved entry and exit points. This method should be backed up by applying the Guppy CBL moving stop loss. (See www.guppytraders.com)
The Guppy MMA indicator is built using the following exponential moving averages: Short Term - 3,5,8,10,12 & 15 | Long Term - 30,35,40,45,50 & 60.It is a good idea to monitor the broad market trend as well as the parent share. An end to the 'Rolling Up' process can be signaled when either the parent share or the broad market breaks out of its established trend. The chart below shows how NAB and the All Ords reversed at the same time.
