Why gold is a great market for tramline trading

The gold market is on virtually every spread-better's radar. Here, John C Burford explains the benefits of 'tramline' trading' when spread betting on gold.

In my most recent posts, I've been giving examples of how you can trade in the crude oil market using my tramline trading approach. This method, along with the Elliott wave/Fibonacci principles, allows for precise forecasts of market direction and turning points with high reliability. Very few trading methods can give you this.

Now it's time to turn our attention to gold. This market is on virtually every spread-better's radar. And we all know why. Claims that we're heading for the demise of 'fiat' currencies are all over the blogosphere. Historically, gold has been the only 'real' money, which is why you should be bullish. It all seems so obvious.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

I read many comments on articles on gold in a few financial websites, many are quite violently bullish on gold (and to a slightly lesser extent, silver). But one very interesting observation is that I have yet to read a comment or article that's bearish on gold. As a trader (who should never become 'married' to an economic view, unless it's supported by the market), this is noteworthy.

So what does the market tell us about gold?

But let's see what the market can tell us using my tramline methods. Recall that a tramline is simply a line of support and resistance that separates phases of trading. One phase is where trading is below the line (resistance) and the other phase is where trading above it (support).

Advertisement - Article continues below

If I can find parallel lines which connect many of other major highs and lows, they will create a valid tramline. And if I can find yet more parallel lines that are equidistant from each other, and that intersect even more highs and lows, this will create another tramline.

As I showed in the crude oil examples, this process can be repeated ad infinitum until it stops working.

So here is the daily chart for gold, going back just over two years:


(Click on the chart for a larger version)

I have made my 'best fit' of a potential centre tramline using many of the important highs and lows made over this period. This is the chart up to January. I have marked important highs and lows with purple boxes, and I have highlighted the late 2010 trading with red arrows. I shall look at this area in more detail later.

Now let's see if I can make a case for a second tramline. Using my parallel line tool on my spread-betting platform, I find a good candidate above my original line:


(Click on the chart for a larger version)

Advertisement - Article continues below

Again, I have marked important highs with purple boxes. So now, I have a good working basis for my tramline pair.

Using multiple tramlines

Now this is where it gets interesting. I can draw a third tramline mid-way between this pair and it passes through (or close to) other important highs and lows. But that is not all, if I draw a fourth line equidistant beneath my original lower tramline, this is what we get:


(Click on the chart for a larger version)

There is only one point close to this fourth line, and it overshoots it by about $12. I will get back to this line later, as it could well figure in my forecast!

Trading in late 2010 was very volatile with wide swings up and down. This occurred after a huge and historic bull run, which really got going in 2005 from the $400 level. Here is a closer look at trading in 2010:


(Click on the chart for a larger version)

Advertisement - Article continues below

In December, the market was trading up from the original lower tramline to approach my new third tramline. It hit that line and immediately backed off (marked by red arrow). That gave me confidence my tramlines really are in the right place.

Also in the chart, note the "overshoot" of my fourth tramline in the July dip. I'll come back to that in a moment.

What's happening now?

Now let's fast forward to today, 11 February. My original lower tramline was breached in January and the market corrected even further to breach (again) my fourth tramline at the end of January. This month has seen a recovery from a very oversold position. Also, using our Elliott wave concepts, the January decline could be seen to be in only three waves. These are corrective waves. This indicates that the bull market is still intact, at least for now.

With a rebound off the 28 January low, I can now bring in my Fibonacci tool to give some potential turning points for this rally.


(Click on the chart for a larger version)

As can be seen, the rally was turned away at the exact Fibonacci 50% level. This was a great place to short, particularly in light of the overbought momentum reading as marked in purple on the chart above.

Advertisement - Article continues below

The market is currently moving down from that level, and so protective stops could be moved down to break-even, using my break-even rule. But with the market hovering around my fourth tramline, will it find support and have a go at my third tramline? Or will it break below my fourth tramline?

I shall continue this theme and the link with silver in my very next post. Do tune in.

NB: Don't miss my next bit of trading advice. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .



Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular


Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020