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Gold. Are You Shooting Your Own Soldiers
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The early warning signal. Those who lived through the war in England and Germany in World War 2, in many cases, owe their LIFE to the air raid sirens. When those sirens went off, the public went into underground bomb shelters. Those who ignored the sirens often paid the ultimate price.
Amateur investors often pay a similar price, but a financial one. Sometimes, there is no attack after the sirens sound. Better safe than sorry, obviously. The best Alert/Warning systems have different levels. Each level requires more and more action.
In the GOLD market, your number one warning system is: Price. If price falls a bit, buy a bit. If price falls a lot, buy a lot. Hands up all those who think gold is a better buy now than at $250? The investor who bought at 990 is in the hole. The investor who bought at $250 has… quadrupled your money. End of argument.
Many of you use technical analysis as your warning system. Chart oscillators, support/resistance, price patterns, moving averages, etc. If you look at the charts I use, I work in: Layers.
Whether it is an oscillator, or price itself, all I do is done in layers and stages. The current massive head and shoulders consolidation pattern in gold began as a small head and shoulders bottom coming out of 680. That head and shoulders became the head of a larger head and shoulders, and that continued. That “head and shouldering” was your early warning sirens going off bigtime that gold was set to skyrocket. Here’s the chart of the initial head and shoulders bottom at 680. The blue lines extending out from 680 are the the “shouldering”. The slanted blue line to the right of the page is where the massive right shoulder ended up forming. As more shouldering occurred, investors could allocate more capital on weakness, and feel more confident doing so.
Professional traders often use a “one two three” approach to buying; a first buy is placed based on certain technical indicators. Then a 2nd larger buy is placed based on a stronger signal (siren). Finally, a 3rd buy, the largest allocation of risk capital, is placed. The same approach is used to exit the trade. The first sell is the smallest, the 2nd one bigger, at a higher price, and the 3rd is the biggest, at the highest price.
If a professional uses 3 tries, an amateur needs more. Because you don’t have the timing of a professional. Unfortunately, most amateurs use only ONE attempt to buy. The odds of losses are very high with such tactics.
Common moving averages used in trading are 5 day, 10, 15, 20, 30, 40, 50, 65, 100, 200. These are some of them, there are more. A cross of the 5 and 10 day is a “first warning”. The professional will try to determine when the actions of the various moving averages give the lowest risk and highest reward entry point.
I don’t believe the average investor is capable of handling the tools used by a professional in the same manner. There is a certain skill level requires. Trendlines can be drawn in different ways by different analysts. One may see a breakout, but not another. My view is there is only one way for the amateur investor can turn themselves into a professional: Via layering in their risk capital in pre-set stages. Many more stages than the professionals use. Ironically, the richest traders of all, the bankers, use that same layering, not just the simple 1,2,3 trade entry and exiting.
The Relative Strength Index (RSI) and the Stochastics are two indicators that have been very frustrating for traders. The RSI can trade close to overbought or oversold, without actually going there. Traders don’t take action, only to see RSI reverse and price follow in a big way. Stochastics often can stay overbought or oversold for long periods of time while price continues in the same direction. Or give a huge number of false signals.
The large error made by amateur traders is to keep looking for new and better oscillators and indicators. One solution to the RSI difficulties was the development of the “Stochastics RSI”. This created an oscillator that would cross into overbot and oversold territory while the RSI itself did not. The solution created more problems, as many false signals were generated. The RSI itself is much less prone to false signals.
My rule is that the longer term price charts and indicators/oscillators must “rule” the shorter term ones, and price rules all. Let’s take a typical example of gold rising as it has from 913 to 946, basis the August contract. Take a look below at the daily gold chart I’ll post on the site this morning. You can see that the RSI never reached the classic oversold line of 30. On the other hand, the StochRSI did go to oversold.
That’s true, but it’s also true that PRICE continues down after StochRSI went there. Some technicians develop an army of rules and regulations to handle these “false moves”. Things like, “well, first it has to go below the oversold line, then it must be confirmed by ABC, then it must do XYZ, and then it is a buy”.
If you own a business, you don’t really have time to be monitoring and analyzing charts for 10 hours a day. In some cases, you don’t have 10 minutes. If you add in all the stoplosses and slippage, and the occasional times when price does a monster gap beyond your stoploss, the bottom line is all that excessive analysis, while theoretically plausible, in practise doesn’t make you ANY money.
I come into this game from a family of athletes and teachers. Failure is unacceptable and I bring that mentality to the investment game. If a trading tool can’t be used by an “idiot” profitably, I have zero interest in it. And I doubt that it will generate real profits over time for anyone but the top pros.
The StochasticsRSI should be used as ONE early warning system component on the gold market battlefield. When it gives the first buy signal, commit the smallest amount of your risk capital. If the main RSI then confirms the StochRSI signal with by going to oversold itself, commit a larger amt of risk capital.
If you get into a complicated system of analyzing whether the technicals are a “real buy” or a “false signal”, you’ll fall into the trap of stoplosses. Bailing on gold via stoplosses (which I term “takelosses”, not stoplosses) is a failed strategy for amateur investors. The small losses soon add up to a 100% loss of all risk capital, whether your takeloss is 10%, 20%, or 1%.
Better to assume the signals are real, but allocate your risk capital in proportion to the strength of the signal. Look at the allocation of capital to that price point as a soldier or weapon on your battlefield. Gold is the lowest risk investment in the world. Hello, Earth to Mars: That means your gold soldiers at any and all price points have a near ZERO chance of being KILLED, since gold has the lowest chance of going to a price of zero. Gold doesn’t rot. There is no management team to go bankrupt. Stop killing your own soldiers! The bankers don’t need to attack the gold community. The gold community, for the most part, is killing our own soldiers. “Hey, there’s one of my generals, here’s my plan: I’m going to shoot him!” Rational? NO.
There are no signals that call for 100% allocation of your capital at any single price point. Accept that many of the signals will be “false”. Just because price doesn’t bottom or top when your indicators say so, that doesn’t mean you made a mistake taking buy or sell action at those points. If you take action with 100% of risk capital at any single price point, then yes, you’ve made a massive error.
Most investors like to look at the exact bottom of a move and then calculate how much they would have made if they bought there and sold at the top. I do the opposite. I picture myself buying at the exact top, and then build the tactics to manage my actions all thru the decline.
Special Offer For Kitco Readers: Send me an email and I’ll rush you my free report on customizing your favourite technical oscillators! I’ll show you how to adjust indicators like the StochasticsRSI to fit your personal trading preferences. Make the StochRSI work for you, not the other way round. I’ll apply these indicators to Gold and the Dow and include special coverage of the application of risk capital with moving average ribbons. Cheers!
Thank you,
Stewart Thomson
Graceland Updates
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Risks, Disclaimers, Legal: Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line: Are You Prepared?
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