My gold call was wrong – but I escaped without a loss

John C Burford's attempts to short gold backfired as the yellow metal surged to new highs. But by sticking firmly to his risk management rules, he was able to walk away from the trade having lost nothing.

Previously, I attempted to trade gold from the short side: The tide has turned for gold.

As I now know big mistake!

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Despite the strong evidence that gold might top in the $1,630 area, it roared right past that level yesterday in no uncertain terms.

This experience is yet another lesson in risk management. Thankfully, when I was shorting gold, my risk management rules enabled me to walk away with no losses.

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I had identified a superb tramline that passed through several important tops over the previous four years. It had been major resistance for all that time, and so had to be respected.

Below is the daily chart updated:

MWT-11-08-03-1

(Click on the chart for a larger version)

With yesterday's upward break, the market is now entering a new tramline channel.

So, I can now draw the upper equidistant tramline, which nicely passes through the major 2008 high (marked by the red arrow).

Until further notice, the market should continue upwards. Now the long-range target must be the upper tramline in the $2,000 area.

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A few days ago, I would have put the odds of that occurring as quite low!

The only relevant question to ask a trader

OK, so I have egg on my face, but did I lose any money?

That is the only relevant question to ask a trader! A trader does not want to be right he just wants to make (or not lose) money.

Let's take a look at the close-up as marked by the purple box:

MWT-11-08-03-2

(Click on the chart for a larger version)

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Because my target had long been the $1,628 area at the tramline, the market backed off the line four times before yesterday's break.

That gave me encouragement, but it was short-lived.

But note that all of my short sales were in profit very quickly as the market bounced down off the tramline.

That enabled me to place break-even protective stops within a few hours on every occasion. And when the market zoomed through the $1,628 area, I was taken out for zero loss.

Phew! I had dodged that bullet.

So no damage had been done, even though I was wrong on the market. But I was sadly not positioned long and making profits, as the gold bulls are.

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Trading Tip: When selling into a rising trend, do so on strength, such as at a tramline, or at a Fibonacci retracement.

This will very often give you an opportunity to use my break even rule.

Selling on weakness, such as at a trendline break, will often get you caught out on a resumption of the uptrend and unable to quickly move your stop to break even.

You will then take that original 3% loss, if you have used my 3% rule .

Always maintain control never trade on emotion

So, have I changed my stance on gold? Most certainly!

But emotionally, I will find it hard to trade from the long side now. This is a challenge for any trader.

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But, I let the markets make the decisions. Why? Because if I had an opinion, the market would still go on its merry way, regardless of me.

The big problem with a strongly-held opinion is that you may well be correct for a time, but you would probably fail to recognise the change in trend when it inevitably occurs.

You would then likely be in a state of denial and so watch your lovely profits dissolve. That is a devastating feeling.

But don't worry: we've all been there.

If you are serious about trading, you will need to acknowledge your emotional responses to certain events and then control them!

It is normal to feel more and more confident as the market goes in your direction. But that confidence can lead you into making rash decisions.

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The gold market is, this morning, forming an exponential trace on the hourly chart:

MWT-11-08-03-3

(Click on the chart for a larger version)

If I was buying now, I would be going long on an exponential rise (see the red arrows), and on very high over-bought momentum.

But the potential for a big corrective move down is very high. So, even though I could be tempted to jump on board this rocket (the normal reaction), the risks would be far too high for me.

So my head says wait for a big dip, and then re-assess.

It is not easy on the emotions to watch a market making a strong move without me being on board. But I know I will miss more trades than I will catch. That is the nature of trading.

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