More Fibonacci trades in gold

I find the gold market one of the trickiest to swing trade – but that does not stop me trying! This market is particularly prone to spiky moves, where there is a sharp move either up or down, and then a rapid retracement. It is as if some traders are gunning for the stops – and I’m sure some do.

When I started trading the Comex was notorious for this practice, since trading there was open outcry only.

In fact, many traders automatically fade these moves (they buy when the sell-stops are hit), and many make a decent living at it, I’m sure.

Many traders use previous minor highs and lows to position their stops. If long, they would place their stop just under a recent low. How many times have we seen the market take these out, and then resume the advance?

This stop-loss strategy is poor. I prefer to use either tramlines or adjacent Fibonacci levels as my guide.

In recent posts, I have shown that it is possible to use Fibonacci retracements to guide both low-risk entries and exits. In fact, there have been several trading opportunities available.

In Monday’s post, I noted that the market sported a near-perfect tramline pair on the hourly chart:

Gold price spread betting chart

(Click on the chart for a larger version)

Then, the market was heading for my lower tramline, and according to my tramline trading rule, I was waiting for a closer encounter in order to enter a low-risk long trade.

Of course, with secure tramlines drawn, I could enter a resting buy order ahead and take a chance that the market would touch it… and get on with my life!

This is the ideal option for a busy trader who is not able to constantly monitor their screen. That is just one of the many benefits of trading with tramlines.

As it happened, the market did make a close encounter, and I was in with a long trade:

Gold price spread betting chart

(Click on the chart for a larger version)

I placed my protective stop just under the tramline (pink bar) for a low-risk trade.

The market duly found support there and moved back up:

Gold price spread betting chart

(Click on the chart for a larger version)

When the market rallied to the $1,680 area, it hit resistance (pink bar). This was a possible level to take profits, of course.

There’s always another bus

This is a moment of decision for all traders! Will you take a quick profit there – and possibly miss out on more gain if the resistance can be broken – or stay with the trade with your protective stop moved to break-even?

Whatever decision is made – and there is no golden rule here – you have to live with it. No regrets! Move on to the next trade.

Your goal should be the business-like gradual accumulation of profits over time. In a month, you will have forgotten this trade. It’s not important in the great scheme of things.

If you had taken profits and the market was soaring up, there will be another opportunity to get back on board using your trading methods.

And if the market moved back down and stopped you out at break-even, that was a nothing trade. No big deal. Just keep monitoring the market for signs of another entry, be it long or short. There is always another bus coming along.

As it happened, the resistance was a brick wall and the market moved down. This is the position this morning:

Gold price spread betting chart

(Click on the chart for a larger version)

The move down off the $1,684 high was very sharp, but stopped right on the Fibonacci 76% retrace. That is very pretty – and gives another trading opportunity.

I am still trading on the long side within my tramlines with the trend still up (lower tramline holding), so the correct trade is to buy at the Fibonacci level with a protective stop just below for another low-risk entry.

But a glance at the above chart will tell you that the market is rallying into overhead resistance and will likely encounter difficulty in progressing.

So where is the market likely to turn?

Once again, I turn to my trusty Fibonacci tool:

Gold price spread betting chart

(Click on the chart for a larger version)

There is a slight overshoot of the Fibonacci 38% level, but that was the area to consider taking profits on the long trade.

I have applied my Fibonacci tool to the latest pivot points, as I always recommend.

So, again, Mr Fibonacci proves himself very useful indeed. I must visit Pisa and pay homage to this generous man!

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

• Don’t miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I’ve written them, just sign up here
. If you have any queries regarding MoneyWeek Trader, please contact us here.

3 Responses

  1. 06/02/2013, David Fletcher wrote

    Whilst I have not read this whole article I just wanted to say that I agree with John when he talks about previous high/low being a poor stop loss strategy. It is, but by placing a stop loss at tram lines or fibonacci levels you’ll find that you need deep pockets!
    I’m a swing trader and I trade daily prices. Sure I look at the weekly and then before pulling the trigger I’ll look at the hourly but essentially if I am trading daily swings then it’s daily stops I require and not some stop distance which is going to cost a packet. For me if the criteria for a daily swing is negated then I’ll know about it the very next day…I usually place swing trades as near as possible to the day end so which ensures the swing trade is still valid! A lot can change inside one day!

  2. 06/02/2013, Argyll wrote

    John

    I find your articles interesting, but why spend so much time on short term gold price movements? The small gains are not worth the large investment risk, especially as the trade commissions plus the foreign currency exchange commissions are likely to wipe out any gain?

  3. 06/02/2013, James Murphy wrote

    ofit of £250 or a stopped out trade at maybe a $5 drop.

    If you follow John’s guidance on Fibonacci trades then half decent, low risk trades can be executed. And spread trading should in my view, only be conducted with 5/10% of your overall capital, so no large investment risks here!!

Commenting on this article closed

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