Article / 30 May 2016 at 0:21 GMT

Protective stops served well for trading gold's rise

Managing Director / Technical Research Limited
New Zealand
  • Adjusting the stop loss as the market moves serves to “lock-in” profits
  • Once in, I anticipated upside potential for golf in the months ahead
  • In late February, gold’s rally began losing upside momentum
  • Gold can (eventually) extend its developing bull market advance a lot further

By Max McKegg

Having previously enjoyed considerable success on the short side of gold’s bear market, it became increasingly apparent as 2015 progressed that gold was completing a complex “Double Three” Elliott Wave corrective structure, as well as a bullish classical charting Descending Wedge pattern, alerting me to the prospect of a major trend reversal and excellent buying opportunity (refer weekly chart below).

Gold weekly chart (click to enlarge)
Gold Weekly Chart
 Source: ThomsonReuters  

Trade Entry

The first trading day of this year saw gold test Descending Wedge support and complete its requisite Elliott Wave downside corrective sequence in the process.

Subsequently, upon the completion of a short term basing formation, I bought gold at $1,078.30/oz (see daily chart below) with an initial stop loss at $1,057/oz (just under the last short term low and Wave (2) bottom) and alerted my subscribers accordingly. I was leveraged at 2:1, risking about 3.95% of my total trading capital.

I kept raising my stop loss (as is my practice) under the prior corrective lows (sometimes this works very well and other times in doesn’t) but once in a trade, I focus heavily upon defence and am not prepared to let profits “come back upon me”.

When the gold rally sputtered in February, safeguards were needed. Photo: IStock

This practice of adjusting my stop loss as the market moves in my direction is a two-edged sword. On the one hand, if the market sustains a very sharp corrective reaction, then it will almost certainly stop me out.

However, I am prepared to accept this, as it does not preclude the opportunity of entering the trade again.

Also, this practice of adjusting my stop loss as the market moves my way serves to “lock-in” profits and if the market abruptly reverses direction (well before my ultimate objective is ever reached) then it safeguards me against an unexpected (and unwanted) loss, through holding onto a position for too long.

In short, it is effective risk management and this is what I live and die by as a professional trader.

Gold daily chart (click to enlarge)
Gold Daily Chart
 Source: ThomsonReuters

Given the magnitude of gold’s bear market decline (from $1,920/oz - $1,046/oz, refer weekly chart below) the upside potential ahead was (and remains) considerable and I confidently entered my long gold position with “high hopes”, anticipating considerable upside potential in the months ahead.

Trade outcome

However, in late February, gold’s rally began losing upside momentum (as a bearish short term Rising Wedge developed) and on March 13 I was stopped out of my long gold position at $1,234.90 (see daily chart below) for a gain of $156.60; yielding a total position profit of about 29% of my trading capital.

I still believe that gold can (eventually) extend its developing bull market advance a lot further going forward but since I was stopped out in mid-March I have been side-lined, in anticipation of the next worthwhile buying opportunity and will advise my subscribers When this occurs.

I am never willing to become “wedded” to any particular market view at the cost of my P+L and that is the key "take-away” from this trade.

Gold daily chart (click to enlarge)
Source: ThomsonReuters

-- Edited by Adam Courtenay

Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade, then click here to follow him.

ForexForever ForexForever
very impressive trade Max!
Vancouver Vancouver


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