By Imre Gams, Editor, Money Trends Gold is setting up for another big move… In the September 21 issue of Money Trends, I wrote about a symmetrical triangle forming in the gold futures market. This triangle was a great trade setup because it allowed for the placement of both buy and sell orders… All I had to do was wait for the market to break out in one direction or the other and then delete the order that did not get triggered. Gold ended up breaking out of the bottom of the triangle and had a swift decline of nearly 4%. Since this swift decline, prices have traded in a generally sideways fashion… And now the yellow metal is once again at a critical juncture. To figure out where gold is going next, we will first explore the Wave Principle – also known as Elliott Wave Theory – a little bit further… Market Trends Are Like a Jigsaw Puzzle As regular readers know, the Wave Principle is my favorite method of analysis for forecasting the market. (For more on how it works, see the August 26 Money Trends.) One of my favorite features underpinning the Wave Principle is that we know precisely where a bullish view must be discarded and a bearish view should be adopted, and vice versa. These key levels can be measured down to the tick, which is incredibly useful. As the price action of a market progresses, new key levels can be identified which support the existing trend. If these key levels are violated, then at minimum, an alternative view should be considered. Think of it like putting together a jigsaw puzzle. The best way to put together a puzzle is to work on the edges first. You can easily identify the edge pieces and put non-edge pieces into a separate pile. As the puzzle progresses, it will start to become clearer where those non-edge pieces will go. It is the same with Elliott Wave analysis. As a trend gets underway, it is crucial to figure out its invalidation point. As the trend progresses, new invalidation points will reveal themselves. Let’s now apply this concept to gold by looking at the chart below. From an analytical perspective, gold still remains quite straightforward. So long as prices are below the origin of wave “e” of the symmetrical triangle at 1983.8, I will stay bearish in the short-term. And I’ll conclude that Wave “4” has further to go before the entire correction is complete. From a trading perspective, there are multiple options at hand. Let’s break them down… Three Important Trading Principles In my last article on gold’s developing triangle, I wrote, “This bearish view will become valid if we break below the (d) point of this triangle, which comes in at 1911.7.” Since then, we’ve had the opportunity to apply three important trading principles: lessen risk, eliminate risk, and protect open profits. If a trade develops favorably, I can first lessen my risk. As it continues to develop, I can think about eliminating my risk entirely. And finally, I can focus on protecting open profits. In this case, the proposed trade setup did develop favorably, and we had the opportunity to apply these valuable trade management principles. Let’s look at some of the possible options that were available as this trade developed. As the trade moved into the money, stop-loss levels could have been tightened or moved to the original entry point, which should’ve resulted in a breakeven trade as the worst-case scenario. Tightening stop-loss levels is one of my go-to management techniques. An important point to keep in mind when using this technique is to factor in any fees or costs associated with putting on the trade when you tighten your stop-loss. With this specific setup in gold, using this strategy would have already resulted in being knocked out of the trade for the time being. This is perfectly acceptable! If you still like the trade, you can always get back into it. You may even be able to get back in at a better price. As the trade moved into the money, taking a small, partial profit would have been possible. This could be combined with moving the stop-loss lower and away from the entry point OR leaving the stop-loss as is. Sometimes, I will take a strategically calculated partial profit on a trade while leaving my stop loss at its original level. For example, if I am prepared to risk $500 on a trade and I have a floating profit of $2,000, I may take a profit of $500 (in addition to commission costs and other fees) and leave my stop loss as-is. This should once again result in a breakeven trade as the worst-case scenario. The Benefit of Using Triangles in Your Trading If I combine both my analyst and trader hats, my view is this… I am happy to sit with a more protected short position in gold, knowing that I have been able to lessen my risk on the trade. I also know where my key level is. If we break above 1,984, then my bias would turn bullish. If you haven’t managed your trade as of yet, you should at the very least ensure you have a firm stop-loss in place. The absolute invalidation point for sellers is 1,984. If we break above this level, that is my confirmation that Wave 4 has already concluded. And that is the most important point in this entire article. A complete 5-wave cycle has not yet taken place. I have only counted to 4. Whether the bearish triangle has already concluded, the fourth wave is still to be seen. My favorite feature about triangles is that they offer two trading opportunities. One opportunity is to go with the breakout of the triangle. The second is to trade in the opposite direction once the triangle’s thrust is over. Either way, there will be further upside to play for in gold before a larger correction ensues. I will be watching closely. Regards, Imre Gams Editor, Money Trends P.S. If you find yourself practicing your Elliott Wave analysis and charting gold in real-time, I’d love to hear about it. Write in at feedback@andykriegertrading.com. |