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Gold hits my target and backs off
John C Burford explains why he trades swings in the gold market, and why strict money management is key.
I had an upper target in the $1,640 area, and wrote: "This line meets the Fibonacci 38% retrace level in the $1,640 region. That is the level I will be using as my possible target and where I will be looking to short again, if the market can make it above the 23% level."
Belowis the chart I showed on 19 December.
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Following that high, the market promptly declined below the 15 December low to make new lows for the move. I then moved my protective stop down to my entry level, using my break-even rule.
I then had a 'free' ride on this trade a great position to be in.
(Click on the chart for a larger version)
Where should I take profits?
After that $1,642 high was put in, I was then able to search for possible tramlines and here is the result of my search:
(Click on the chart for a larger version)
The centre line is my best fit, and the lower one also fits very well. Note that I have used a previous minor high to anchor the lower tramline. To understand why I use these particular touch-points, have a look at my video tutorials .
I have also drawn in a 'satellite' tramline above the centre one, which takes in the extreme touch-points. Recall in Wednesday's email on the euro, I had to do a similar operation.
As the market moved down, it approached my lower tramline and that was the signal to take profits, as I did in the $1,550 area.
Note also the positive momentum divergence, marked by the green arrows another warning sign that the down-move was getting exhausted.
That was a very nice low-risk swing trade yielding a profit of around $80 per ounce, or 800 pips a profit of £800 per £1 spread bet.
The advantage of swing trading vs long-term
This trade vividly highlights why I like to trade market swings, rather than attempt long-term trades.
Since taking profits on 29 December, the market has rallied by almost $100 right back to the area in which I had shorted! If I had held the short trade anticipating holding for a long-term trade, I would be sitting on zero gain, with the market in rally mode. If this rally continues, I would be sitting on a losing position an unhappy thought!
Although my protective stop would be at break-even, and suffer no loss, psychologically I would have kicked myself for not having taken a great profit when offered at the $1,550 lows.
The best mental state for a trader is after a profit has been taken, and the market can then be viewed calmly while searching for another low-risk trade. If you had just kicked yourself, you would likely be in no mood to view anything calmly!
Gold may be rallying, but I'm still trading the short side
OK, we have a gold rally on our hands here is the close-up of the current situation:
(Click on the chart for a larger version)
I have drawn in a new set of up-sloping tramlines containing the rally. The touch-points are pretty good. But now at the $1,620 area, we are closely approaching the Fibonacci 38% retrace of the move down from the $1,800 high, the down-sloping satellite tramline, and the upper up-sloping tramline.
This area is marked by my 'Resistance' label in the blue box. This is formidable resistance and can be used to set another short trade.
You may ask: Why am I trading from the short side, and not the long side?
Simply because in the bigger picture, it appears we are in third Elliott down waves of several degrees (timescales). I have written about this before, and so far, these patterns have not changed. We are in a major bear market.
It is therefore prudent to trade from the short side, as rallies can reverse sharply as we have seen with the above trade.
But nothing is written in stone in the markets. I am fully prepared to be wrong but any losses I take will be limited by my 3% and break-even rules.
Successful trading is all about taking your trades only when the odds are definitely on your side and no punting! Capital preservation is absolutely the most important driver in your trading.
Watch out for a new video tutorial on my 3% rule, coming soon.
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:
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
