All top traders recognise this warning signal

“This gold rally is finished”. That’s how I put it last week. It was a pretty gutsy headline, was it not? I risked having egg on my face.

The market was rising strongly into the $1,300 area at the time.

I was ‘long’ gold (betting that the price would rise), since it traded for $1,152 last November, and finally cashed out at $1,292 for an impressive $140 profit. At £1 a pip – the minimum bet size – that was a gain of $14,000 in less than three months.

Most traders would be opening the champagne after that kind of gain – and crucially, believing they were investment geniuses. The adrenalin rush would be so intense that they would fall in love with their long gold position and perhaps even double-down on their bet. “This thing is going to the moon!”

But you see, that is the opposite of the correct attitude for swing trading. I know – it goes against your nature, doesn’t it? It goes against mine, too. When the market is going your way, it is perfectly natural to feel elated.

But as an experienced swing trader, I understand the true significance of that feeling. It’s a warning.

When I feel that way, when excitement and emotion begins to well up inside me, I’ve learned that it’s time to exit the trade. You have to train yourself to recognise this adrenalin rush– and do the opposite of whatever it’s telling you.

This isn’t easy. But it is a vital skill. You need to learn it.

Why should you do this? You need to remember that you’re not the only person who’s trading this market. You’re excited by the rally – but so are most others. And as I’ve repeated over and over in MoneyWeek Trader, the best way to make profits is to trade against the crowd.

How to think like a trader

So how has the market progressed since then? Here is the daily chart as of this morning:

The market bounced right off the Fibonacci 78% level

Gold price spread betting chart

I highlighted the Fibonacci 78% level in my post of 23 January. It’s the pink horizontal bar in the chart above.

As you can see, the 78% level proved very significant. As I predicted, the market bounced off the line and headed back downwards.

That trade made money. But even if it hadn’t worked out that way, if gold had broken through the 78% level, it would still have been the correct decision given the information we had at that time. All you can do is play the percentages.

If the market had continued to sail away above the $1,300 level, how would I feel at having missed out on extra profit?

Most traders would kick themselves for being so foolish. But that is a very destructive attitude, and to be avoided.

Sometimes you play the percentages, make the correct decision, and the market moves against you. Move on to the next trade. 

Fibonacci shows where gold is going next

I want to zoom in and take a look at the hourly chart, because the recent action highlights a very important principle. It shows how tramlines, Elliott waves and Fibonacci can work together together to forecast price targets.

Yesterday, I set up my Fibonacci readings based on the early January low and last week’s high. The various Fibonacci levels gave me possible price targets.

Next, I was able to draw a wonderful tramline trio. The lowest of the three tramlines intersected with the Fibonacci 38% level. The 38% level then moved from a possible target to a probable target.

How did the market play out?

Fibonacci, tramlines and Elliott waves combine to show me a price target

Gold price spread betting chart

Right on cue, the market dipped to that level last night and is currently bouncing back up off of it. Tramlines and Fibonacci combined to give me a highly probable price target.

Where to next for gold? One very important clue to the next likely move is to note the clear Elliott wave A-B-C pattern which can be seen in the decline off the $1,300 high (shown in the chart with green lines). A-B-C is always a counter-trend pattern. The implication? If the $1,250 low can hold the next likely move will be up.