The danger of setting your stops too close

Following a decline in the gold market, John C Burford moves his protective stop down only to see his trade stopped out as a result of a vicious spike in the gold price. Yet, his forecast of a downtrend holds true and another opportunity for a short sale presents itself.

Last week,I wrote about some gold trades: Four key traders lessons that will keep you in the game. I left it with the market trading above my central tramline T1:


(Click on the chart for a larger version)

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

I then stated that I would be setting a sell-stop to enter a short trade just below T1. I also said that I would be setting a protective buy-stop of around $5 on this trade.

I suggested that if T1 were to give way, my first target would be the lowest tramline, T3.

Advertisement - Article continues below

So let's see how this action developed.

What happened next?

Right after this, gold did indeed drop down and broke beneath T1 and I was stopped in at the $1,542 level. I then placed my stop at $1,547. The $5 risk was well within my 3% Rule.


(Click on the chart for a larger version)

As you can see, the market did fall to T3 at the $1,534 area on June 9.

Very short-term traders would be offered the chance to take profits there of around £80 per £1 spread bet.

But I decided to move my stop down to break-even following my Break-Even Rule. There was a paper gain of $8 and I wanted to give this trade room to work lower, if the market wished to cooperate.

Advertisement - Article continues below

Stopped out on a vicious spike

But as you can see, in the afternoon of Thursday June 9, the market rallied through my stop, taking me out for a break-even trade (a "wash"). And it carried right on to spike above T1.

These spiky overshoots are common in gold, which makes gold trading very tricky in the short-term.

The market then reversed course and is currently heading lower as I originally forecast!

In fact, the market has fallen to my even lower Tramline at the $1,526 level. This is annoying, as I believe gold has the potential to move very much lower and I don't want to miss this trade.

So, how should I approach this market?

It is clear that setting very close stops is generally a poor idea unless you get lucky.

Advertisement - Article continues below

For me, it is far better to first focus on the larger trends (if any) on the daily chart, and then go to the hourly chart.

Here is the current situation:


(Click on the chart for a larger version)

If I believe the May 1 high at $1,577 will stand for some time and I have good reasons for this view then the current rally is a retracement of the sharp May fall.

That means the rally will likely stop at a Fibonacci retracement. And so it has (so far!).

Note the weakening momentum (marked by green arrows) as the $1,550 level was approached a bearish sign.

Advertisement - Article continues below

Getting back to the question of how to trade gold here, the current market is only about $20 off the retracement rally high.

So a trader who is able to set a wider protective stop could short anywhere here and set the stop just above the $1,550 level.

If the market rallied back to this area, it would likely negate my retracement idea.

And this style of trading would get around the annoying habit of gold to make spiky moves which stop us out prematurely.

As ever, it is very much a personal decision which trading style to adopt. There is no "best" way to trade for everyone. As a trader, you must work on your own style and develop it.

The good news is that, as with most things, the more trades you do, the more efficient you become. And having some background knowledge such as this can help you make an informed decision.

Advertisement - Article continues below

Also, the more you study the charts and observe the action around Fibonacci retracements and the tramlines, the more in tune' with the markets you become making you a better trader.

NB: 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 .



Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
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

Most Popular

Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019