Gold 5 Day Chart Trend Reversal?

Today I'm going to analyze a 5 day chart of Gold (using GLD) to see what, if any, profitable trades could have been made without the entry signals being too complicated.

By "not too complicated" I mean not getting too involved in the signals and chart such as not relying too much on going back and reviewing multiple timeframes, looking at related news nor complicated technical indicators.

In the chart below (which is a 5 day 15 minute bar chart (OHLC) of GLD from 03/22/2011 thru 03/28/2011) we'll be looking at price action along with trendlines to find entry signals combined with stop loss levels that would have potentially produced profitable short term swing trades and possibly entry points for a longer term swing trade.

Note: Looking at "what if" examples can help by finding strategies that work in multiple trade situations and then putting those same strategies to use in live trading when ready.

Here's the chart we'll be looking at for today's example:

Gold 5 Day Chart Trend Reversal

I'm going to break down each day with potential entry signals and stop losses. Keep in mind that this example and signals I'm mentioning are looking for trades to last 1 or more days, not intraday trading.

First day - Tuesday March 22, 2011: Since this is the first day on our chart, we can't really expect a clear entry signal here as we have nothing to compare the price action to. The price action for this day was basically channeling sideways with no clear decisiveness by traders. The only clear signal would have been if the sideways price action turned into a breakout towards the end of the day. A breakout to the upside could have been a entry signal to go long with a stop loss just below the days low points and a breakout to the downside could have been taken as a signal to go short, with a stop loss just above the days high.

Day 2 - Wednesday March 23, 2011: Prices gapped open higher than the previous days highs. This could have been considered a signal to go long, with a stop loss just below the previous days high or lows, depending on risk tolerance.

Many times a reversal occurs after a gap higher, but a short entry would only be indicated if prices began to pullback, which in this case they did not.

Day 3 - Thursday March 24, 2011: Prices fluctuated at the open near the previous days highs (resistance) and then broke out higher. Since we are looking for short term swing type trades we want to keep stop losses tight (one method of course). Since we are now into the second day of a long position and we have another gap higher to near $141, we move up our stop loss to just below the breakout near $140.50 to help minimize potential losses should a reversal occur.

You can see around midday, that's exactly what happened - prices reversed course, strongly. Had a close stop loss been in place and moved up, we would have locked in a small profit. This would have been nothing to speak of in profits but our goal is to try and catch bigger moves while minimizing losses.

I'm going to change course here on Day 3 because another option would have been to start out looking for short entry signals.

Why would we want to short Gold? Because Gold has been moving higher for so long that we know there will be pullbacks like everything that goes higher, and eventually, a significant reversal.

There are a couple of potential types of moves that typically are stronger and of larger percentages than others. 1) a breakout, either to the upside or downside, thru a previous support or resistance level 2) a reversal after a breakout or new highs.

Day 3 on March 24, 2011 broke out to new highs on our chart which also was new 52 week highs as well as pretty close to a double top formation. All of these would line up great for a potential reversal.

So, as prices on Day 3 broke out to new highs and then reversed, a signal to go short would have been when prices moved lower through that mornings low near $140.25 with a stop loss just above the days high above $141.28 to protect against additional moves higher.

Day 4 - March 25, 2011: Prices opened a bit higher but didn't move up through the previous days morning lows (our short entry point). This is a good sign of potential further weakness. Prices moved lower again and the closed near the previous days close once again for the weekend.

Day 5 - March 28, 2011, the final day on our chart: Prices gapped open lower and then moved up to the previous days lows and then reversed into further weakness again, closing about midway of the days price range. Just as in our long scenario above when we adjusted our stop loss as prices gapped higher, since prices gapped lower on Day 5, we would move our stop loss down to try and lock in profits also. Using simple trendlines and support and resistance levels we could have easily moved our stop loss just above the previous days lows to $139 and not have gotten stopped out yet while lowering our stop loss from $141.28ish to $139.

Another option after a move down like this could be to move the stop loss to breakeven near $140 where we went short. This would allow for a little more near term volatility and the potential to catch more of a lrge move lower if one is coming.

That's it for today. I'll work on a longer term view coming up as Gold seems to potentially be at a turning point if you're a contrarian, or at least a potential lerger pullback.




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