Gold, gold, gold — that’s all you hear about these days. With the volatility in metals, and all commodities for that matter, everyone’s a gold trader or wants to be. But even a gold bull could have experienced serious losses in recent years despite its huge run up because of the huge volatility and tendency to produce stop-shattering corrections amid a strong bullish trend.
Unless you have unlimited capital or have the uncanny ability to pick tops and bottoms, the gold market has been too volatile to simply play it from the long side, even when you are right on the direction. Gold futures dropped more than $150 from March 17 to April 1 and the market didn’t even approach its 200-day moving average or change the long-term trend. Gold has traded substantial volumes electronically since 2006, which has increased its access and improved its liquidity. This has allowed traders to use many short-term strategies in gold that were previously only appropriate for liquid financial futures markets. Any market can be traded. That is what we do as traders: try to figure out which way a market is going, find good spots to enter and, more important, good spots to exit.
Trading success is maintained not with the ability to take profits on good trades, but with the ability to get out of bad ones. Managing your risk is the number one concept that will keep you trading and in the game. One useful strategy involves intermarket analysis. How does gold stand up to ancillary or correlating products that influence price action in the yellow metal?
Silver, the other precious metal, often will chart similarly to gold intra-day. So, look for a decoupling or divergence to develop to indicate that gold might indeed be reversing. “Looking for a sign” shows 15-minute bars of both silver (red) and gold (blue) as they rally substantially on March 5. Many traders often arbitrarily look to sell tops or fade without good reasons, other than maybe it went too far. As you can see, silver and gold make highs (silver at $20.960 and gold at $993.60), pull back, then retest. Silver shows signs of failing, while gold makes higher highs to $995.10. That is when you should begin to question gold’s bullishness and whether it could possibly be overdone. At that point, it is useful to look at gold on a five-minute bar chart and wait for the market to show if it’s coming off its highs (see “Pulling the trigger”). When the first five-minute bar makes a lower low to the previous bar, start to assign the risk/reward to the trade. Your stop-loss should be right above the old high. If that rate is 2 to 1 or better, take the trade. In this example, you would sell gold at $992.60. Look for a target of possible support at $987.60 to cover the trade for a winner.
Silver, however, is just one ancillary you can use this approach with. Several other markets may offer you more confidence to take the trade as they line up like silver did in this example. More good reasons that involve ancillaries, technicals, fundamentals, order flow and risk/reward ratios make certain trades higher percentage trades. Remember, all we are trying to do as traders is to find the right side of the market at that moment. Find a good location to get in and most important, exits that make good risk/reward sense. Don’t lose more when you’re wrong than you make when you’re right. Always know where you’re getting out before you get in.
Anthony Drager, a CBOT member since 1999, has traded futures electronically since 2000. Anthony offers live educational sessions on trading strategies, set ups, preparation, risk management and market selection. He can be reached at antrading_1@yahoo.com , or visit www.themarlinletter.com .
