Price Action on Gold/Silver

Today I would like to look at the charts for both gold and silver in order to determine the price action. Knowing this price action can help us know whether or not we should be buying or selling gold or silver. One of the first things we need to look for is to identify the direction or the trend the chart is moving.

Let’s look at the daily chart for gold. There are a few things that we can look at to help us determine if the price action is bullish or bearish. We need to avoid the urge to look right at the indicators and focus on the more critical item of seeing what the price is doing. If a price is going up then the momentum is bullish and if the price is going down the momentum is bearish. If we want to use something to help better visualize this we can look at a moving average or we can draw trend lines to help us identify this momentum.

Take a look at the chart below where we have placed a 40 period SMA along with some trend lines to help visualize the price action.

Notice on the far right hand side of the chart that the price has been moving down over the last couple of months. Currently, we can see that the price has jumped up in today’s trading to bump into the 40 period SMA along with the downward moving trend line. Seeing the price at this level should make us think that it could do 1 of 2 things. First it could drop back down in the direction of the trend to move lower. Second, it could break through and begin a move back up again. We don’t know for sure, so we will wait and watch for signs of either movement.

Now let’s take a look at the daily chart for silver. Notice the similarity between the gold chart and the silver chart. This chart also shows downward or bearish momentum with the price action. The moving average is also pointing down and the trend line is moving lower. As with the chart of gold we would look for some opportunities to trade this either to the up side or down side depending upon what we see happening. In the end we should not care the direction as long as we are trading with the direction it is moving.

As we look for opportunity’s to trade gold or silver we want to first identify the price action by looking at the direction it is headed. Then we can use things like the moving averages and trend lines to help us better visualize this price action. Once we identify the direction it is moving we will then know whether we should be buying or selling.

Take some time to practice looking at price action, moving averages and trend lines to help you better identify the direction to trade both gold and silver.

Technical Indicator: Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a technical indicator used in technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock, forex, option, or other market based issue on the closing prices of a recent trading period.

The RSI is classified as a technical oscillator, measuring the velocity and magnitude price movements. The momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more positive changes have a higher RSI than stocks which have had more negative changes.

The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, percent levels. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.

The Relative Strength Index was developed by Wells Wilder and published in the 1970’s. Since its introduction, it has become one of the most popular oscillator indices.

Wilder said, that when price moves up very rapidly, at some point it is considered overbought. Likewise, when price falls very rapidly, at some point it is considered oversold, in either case, a reaction or reversal is imminent.

The level of the RSI is a measure of the stock’s recent trading strength. The slope of the RSI is directly proportional to the velocity of a change in the trend. The distance traveled by the RSI is proportional to the magnitude of the move.

The RSI shows that tops and bottoms are often reached when RSI goes above 70 or drops below 30. Traditionally, RSI readings that are greater than the 70 level are considered to be in overbought territory, and RSI readings lower than the 30 level are considered to be in oversold territory. In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend.

Note the oversold and overbought areas as indicated on the forex chart below:

Wilder also noted that chart formations and areas of support and resistance could sometimes be more easily seen on the RSI chart as opposed to the price chart. The center line for the Relative Strength Index is 50, which is often seen as both the support and resistance line for the indicator.

If the Relative Strength Index is below 50, it generally means that the stock’s losses are greater than the gains. When the Relative Strength Index is above 50, it generally means that the gains are greater than the losses.

Similar to Stochastics, the RSI can also be used to indicate potential divergence between the RSI indicator and price action is a very strong indication that a market turning point is imminent. Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm. Bullish divergence occurs when price makes a new low but RSI makes a higher low.

In conclusion, note that the RSI indicator works well in ranging markets like most oscillators but not as well in strong trending markets.

Confidence, Discipline, Success

Today I want to spend a few minutes discussing a trading cycle. This cycle is that of confidence, discipline, and success. This may seem a bit off the topic of trading but in fact it is exactly what many traders are missing in their trading lives. I want to talk about how each of these can affect our own personal trading. Without the first two we are unlikely to have the last one.

In order for a trader to be successful they need to have both confidence and discipline. These two go hand in hand leading us to the success we want. Every trader wants to be successful so takes some time working on these other two and you will find yourself moving towards the last.

Let’s first discuss confidence. One definition of confidence is the unwavering belief in oneself or ones abilities. If we do not have belief in our abilities as a trader we will never have what it takes to develop long term success. This confidence is directly linked to our own personal trading strategy and rules. Without a well-developed and tested trading strategy, we will never have confidence in our trading. Confidence in our system and ourselves will lead us toward the end result we desire. Because we need to have confidence in our trading system, make sure you have spent the necessary time in reviewing, building and testing out your trading system.

Let me make a suggestion as how to do this. First, write down your rules. Second, back test your rules over the last 100 setups that you get following your rules. Third, begin forward trading these rules in a demo account for another 100 setups. If you can go through this process and be profitable, you will then begin to have the confidence you need to follow your system in a live account. If you find that you have done this and are unprofitable, then don’t trade it and go back to the drawing board. Defining your rules, backtesting them, then forward testing them will give you the confidence you need to address the discipline issue.

The second part of this cycle is discipline. Discipline is a behavior set in accord with a specific set of rules. If we are disciplined we always follow our rules. You cannot be a part time disciplined trader or you will not be successful. Focus on becoming 100% disciplined, always follow your rules. Generally, if a trader is not being disciplined it is because they have not gained the proper amount of confidence in their trading system. You must have confidence in order to have discipline.

Finally, if you have both confidence and discipline you will find that success is just around the corner. Successful traders have both these traits. Make sure you work on these traits yourself. Once you do this you will be much happier and profitable in your trades.

Take some time to review where you are with both these traits and begin to change those things you need to improve upon and you will be a more successful trader.

The Exit Row

Always look around for the exits!

While on a recent flight, I was reminded during the safety speech/demonstration to look around and find the nearest exit and become aware of the any alternate exits from my seat. Now many people, including myself, have been guilty of “tuning” this safety speech out and not paying too much attention. However, on this occasion I started thinking about the application of the safety tips of flying to my trading. While entering trades is important, understanding were you are going to exit is perhaps even more important than the entry.

Defining your exit strategy

Traders without good exit procedures in place are really just hoping for a good outcome to that trade. Successful traders plan out their exits by setting initial stop-loss and take-profit targets. Stop-loss and take profit points represent two key ways in which you can plan your exits.

On the other hand, unsuccessful traders often enter a trade without having a good idea of at what points they will exit the trade at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to be greedy and hold on for even more gains.

Planning exits with Initial Stop-Loss and Take-Profit Levels

An initial stop-loss point is the price at which a trader will close a position and take a loss on the trade. Often times, this happens when a trade does not go the way you had hoped. The initial stop loss point is designed to prevent the “it will come back” mentality and will limit losses before they get overwhelming. For example, if long in a stock and it breaks below a key support level, it is often a good time to close the position.

On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often times, this is when there is limited additional upside given the risks. For example, if a stock is approaching key resistance level after a large move upwards, traders may want to sell before a period of consolidation takes place.

How to effectively set Initial Stop-Loss Points

One good way to determine stop-loss or take-profit levels is based on support and resistance levels that can be drawn by connecting previous highs or lows that occurred on significant, above-average volume. A trader can also use longer term moving averages to help establish potential support and resistance levels. The key to determining the best initial stop loss is to determine solid support and resistance levels and to set them just inside these levels by 1/2%.

Conclusion

The important thing to remember is to never place a trade before you determine what your possible exits will be. Know in advance where you are going to place your initial stop loss to keep your losses to a minimum, if the trade goes against you. And place your profit target where you are willing to take a profit when the trade goes in your favor.

What is Fueling the Stock Market’s Rally?

The stock market, as most people know, has been rallying reaching new all-time highs on a regular basis for several weeks now. While witnessing this and participating in it to a degree I have always gotten the feeling that it is somewhat artificial or fake but if it is going to keep going up there is really no reason not to participate in it but of course with allot of caution. There are news stories just about every day stating how the S&P is up 33% since 2010 extolling the strong rise that is increasing the balance of portfolios, pensions and recapturing wealth that was lost in the 2008 melt down but what is the basis of this rise?

Unemployment is still very high and when taking into account the number of people that are out of the workforce altogether that are not included in the national unemployment numbers because they have quit trying to find jobs the real unemployment number is much higher. The Fed stating that unemployment is still high but has stabilized and will begin to come down is based partially on rising real estate prices which creates jobs in the housing market through construction jobs and jobs related to selling real estate and the housing market in general. This sounds good except for the fact that the government has mandated that banks loosen credit requirements for low income earners re-creating a situation where less qualified people will get loans which we know from recent past experience many of them will not be able to pay back. Essentially the government started the last housing bubble in the late 1990’s during the Clinton administration by demanding the same thing, easier credit to people that cannot afford it. It took a decade for this and other factors to catch up to the market but when it did the bubble burst, the same exact bubble is in the process of being created again.

The Fed is concerned that consumer spending is a potential problem because it may not be sustainable at its current level due to our high unemployment which means that the economy will slow down presenting the potential problem of another recession. Corporate earnings have been okay but probably not okay to the point to justify new all-time highs in the stock market.

Clearly the market is not rising based the stability of the country’s economic situation. If we are really interested in seeing what has been fueling the current stock market rally and the economy in general we can stop looking because we saw it on Wednesday May 22,2013. Ben Bernanke told Congress that the Fed’s easy-money policies are creating jobs in various sectors of the economy so tightening credit now would be a mistake. The easy-money policy should be kept in place until the economy stabilizes further. Traders and investors loved this news which sent the stock market soaring to even greater new highs however in typical government right hand doesn’t know what the left hand is doing fashion the minutes of the last Fed policy meeting were presented later in the day which revealed that a number of the Fed participants are willing to begin to tighten credit. This of course sent the stock market tumbling just as quickly as it rose earlier in the day.

My point isn’t to present a synopsis of the events of the day but rather to point out that the sharp rise and subsequent sharp fall makes it very clear exactly what is responsible for the current stock market rally. Many stock market gurus and portfolio managers have stated over the past few months that though the stock market is high it isn’t overvalued. This may or may not be true but what is true is that it is in their best interests for stocks to continue to rise so their wealth and the wealth of the money that they manage increases. To continue the stock market’s rise the average investor must feel good about putting their money into the stock market to continue to fuel the fire so if a professional well noted market guru states that the market is not a bad place to be it can be a self-fulfilling prophecy regardless of its validity. What we saw yesterday was the clearest proof we could ever want that what is fueling the stock market rise is the $85 Billion per month that the Fed is spending to prop up our economy. There is very little substance or basis for the current levels of the stock market so it’s really just another bubble that will burst at some point. The difference between now and 2008 is that we can see this one coming a long way off. We should not be surprised or shocked when it happens we should already be safely in cash waiting for the values and greatly discounted stock prices that the burst will present to us.

Gold and Silver Review

Today we are going to look at what has been happening with gold and silver over the past few months and where it is sitting in relationship to the trend along with where support and resistance may be located. Anytime we look at charts we need to remember that they are what they are, or in other words we should not be reading more into them than what we see. It is easy to get caught up in anticipating what we think is going to happen while ignoring what is actually happening.

The first chart below is that of gold on a daily time frame. The things we look for can also be applied to the smaller time frames if we choose. In this first chart we have outline with the red arrows potential points of support or resistance. When doing this we are looking to identify the areas where there have been multiple time where the price has been rejected. The more rejection point, the more likely it is that the price will stop or be slowed in its move. We also want to place more weight on the more recent areas of support and resistance as we look for potential points of entry. Generally speaking we will look for the price to bounce off these areas or break through them. Regardless of what happens, these areas are important to identify for our trading.

As we evaluate this chart we should notice that the most relavant area is this close support area. We will be looking for some type of movement either up off of this area to take a long position or a break down through it to take a short.

This second daily chart of gold has the 40 period simple moving average on it to help us clarify the overall momentum or trend. It should be clear when looking at this chart that the price action in bearish and the trend is currently moving down. Knowing this should give us some insight into the direction the price wants to move and the direction we should be trading. Look to short in a down trend and go long in an uptrend.

The next two charts below are the daily time frames for silver. We have also place the support and resistance lines on the first one so we can see where there may be some barrier to the price movement. You should see the similarities between both gold and silver as this chart show price near the support area. Knowing this should put us on alert that the price may be getting ready to show some price movement up or through this support.

Likewise in the chart below we have the 40 period simple moving average which also shows a clear down trend in the price action of silver. As with gold, we should look for the bearish trend to direct our trading direction.

By simply reviewing the areas of support and resistance, along with the trend, we should have a pretty good idea of the momentum of our trade. Take some time to review this information on a weekly chart in order to place you on the correct side of the market.

“Buy and Hold” – Stock or Swing Trading?

With the recent run-up of the stock market some are wondering : “Buy and Hold” Stock or Swing Trading – Which is Better?

Is a “Buy and Hold” strategy back in favor? For some decades now, Wall Street has preached that buy and hold investing is the only “safe” way to make money in the market. Wall Street “experts” have claimed there’s no reliable way to time the market and you need to be fully invested at all times to benefit from the growth potential that equities offer in the long term. Remember that the recent market gains are not necessarily due to long-term trends, but a middle- to short-term bull market that may correct dramatically if interest rates increase in the future. The truth is that the Federal Reserve intervention has a much to do with the current market gains as much or more than any other reason.

As we look at a weekly chart of the S&P 500 below as of May 2013, we see that we are only slightly higher over the last couple of weeks above highs of 5 years ago in 2008. We can also look back 12 years ago to 2000 and see that the market has not continued to rise but is actually gone up and down but is virtually in a long run “Stand Still” or only slightly higher over the last decade. Note there have also been periods when the market has been down significantly from the highs during the last 12 years only to barely climb the back to the highs, but never really breaking much new ground.

For the investors who were betting on the buy and hold strategy to increase their portfolio over the approx the last 12 years, they may be up just slightly but have “lost” more than a decade of growth! One contributing factor to this slow down in overall growth are the almost continual bubbles and market corrections that keep happening. First, the Internet bubble at the end of 1998, then the attacks on the World Trade Center in Sept 2001 and the recession that followed, then the Real Estate Bubble in 2008, and now we see the debt bubble building and getting ready to burst. These bubbles create a lot of volatility in the market, which leads to market swings to trade. And there doesn’t seem to be an end to these bubbles in sight. Because of these “bubbles”, the market has had tremendous movement over the past few years. If you had buy and hold investments four years ago, you are in about the same position, or lower, certainly not higher, referring to the chart above.

So the winning strategy over buy and hold has clearly been swing trading. Swing trading has also become much easier and less expensive with the maturing of the internet over the last few years, giving “active” swing traders easier access to online brokers and broader investment choices like ETFs, cheaper commissions, and cheaper, easier-to-use trading tools.

With all of the tools now available, along with the strategies and new instruments available, smart and savvy investors/traders have all but abandoned the buy and hold philosophy in favor of more “active” swing strategies. In light of the fact that going back over the last 12 years the overall market hasn’t gone up much, who can argue? The swing traders are now king!

Moving Average Convergence Divergence

Today we are going to discuss one of the more commonly used charting indicators called the Moving Average Convergence Divergence or MACD. As the name describes, this indicator used moving averages as one of the key components in its creation. It also looks for the convergence and divergence of these moving averages. This indicator was originally created by Gerald Appel and was developed to be a simple way to identify the momentum of the price. By using two moving averages it is taking a trend following indicator and using them to help identify the momentum.

When calculating the MACD, the line is created by using two exponential moving averages. These averages are typically the 12 period and the 26 period ema’s but can be any numbers that the user chooses. Other commonly used numbers are the 8 and 17 periods. The actual line is created by finding the difference between the longer ema from the shorter ema. This line is known as the MACD line and is used to indicate rising or falling momentum on the chart.

As the line rises, the momentum in increasing and the price is rising. As the line falls, the momentum is decreasing and the price is declining. In addition to the MACD line there is another line used by taking a moving average of this MACD line. Typically this is a 9 period moving average of the MACD, but could be any number you choose. These two lines can give us signals as to when to enter the trade based on increasing or decreasing momentum. This is called a MACD crossover.

Take a look at the chart below which shows examples of this type of crossover.

 

In this chart above we have circled the bullish crossovers and boxed the bearish crossovers. Notice how the price begins to build momentum to the up side on a bullish cross and to the down side on a bearish cross. This is one way that traders can use the MACD to help identify areas to buy or sell.

In addition to this you can look for the MACD line to move above or below the zero line to indicate this same bullish and bearish momentum. Looking for divergences is another way to use the MACD line. By comparing the highs and lows with that of the price you can also see potential areas where the price may begin to strengthen or weaken.

As a word of caution, make sure you do not solely rely on the MACD without taking into consideration the price movement on the chart. As with any indicator, you should only use it in conjunction with what is happening with the price of the chart. Too many times traders will only look to the indicator for their trigger only to later realize that the price never confirmed what the indicator showed them.

Take some time to look at the MACD as another tool you can use to help you better identify the momentum on the chart. As you incorporate an indicator like this it can help you see the potential movements a bit clearer.

Technical Indicator: Stochastics

Most traders, if they haven’t used the Stochastic Indicator, have certainly heard about this indicator or have seen it on a chart. New traders, however, may be less familiar with it. The Stochastic Indicator is a great technical analysis tool, but what exactly is it and how can you use it in your trading?

The Stochastic Indicator is a popular indicator in the “oscillator” family of technical indicators. Back in the 1950’s, Dr. George Lane created the Stochastic Oscillator. Many traders also use the indicator to determine overbought and oversold conditions by identifying the tops and bottoms of price cycles in the markets, especially on shorter term charts. Stochastics are used by traders of all markets, including Stocks, Futures, Forex, and Options.

The Stochastic Indicator shows the location of the closing price relative to the recent high-low range. While the Stochastic Indicator is helpful in identifying overbought and oversold levels, the primary use for which George Lane created this indicator was for spotting bullish and bearish divergences. Using Stochastics I will show you that momentum often shifts before price does, creating a divergence between the price action and the Stochastic Indicator. When this condition exists between the indicator and price action, the indicator is sometimes referred to as a Leading Indicator, as we can use the divergence to look for a weakening trend before the price actions reverses.

Using the Stochastic Indicator to recognize these bullish and bearish divergences is my favorite use of the Stochastic Indicator. This is something I use frequently in my trading. The premise is that when a new high or low in a security occurs, but is not confirmed by the Stochastic Indicator, it indicates a potential trend reversal. For example, bullish divergence occurs when price makes a LOWER low, but the Stochastic Indicator makes a HIGHER low. This shows that the downside momentum is slowing, even though prices are continuing to make new lows and a trend reversal may be imminent.

Note the bullish divergence in the chart below as the price action had continued lower at the same time the Stochastic Indicator has started to move higher indicating a potential change in the price movement or trend before the price action shows any real sign of a reversal. Notice the change in trend direction immediately after the bullish divergence is indicated.

BULLISH DIVERGENCE

Bearish divergence is simply the opposite of Bullish divergence and occurs when prices make new HIGHER highs, at the same time the Stochastic Indicator is making LOWER highs. Notice in the chart below, the Stochastic Indicator is making lower highs at the same time the price action is setting higher highs. This is considered Bearish divergence, which could be used to indicate a possible move lower, which actually did occur.

BEARISH DIVERGENCE

While many traders use Stochastics traditionally to identify overbought and oversold areas, identifying divergences to me is the most powerful use of the Stochastic Indicator and one that I use all the time. Try using the Stochastic Indicator to identify these areas of divergence and, therefore, look for potential reversals in the trend.

Where Have All the Robots Gone?

Three, four, or five years ago trading robots were the rage they were almost a trading fad. This makes allot of sense from a pure common sense standpoint. To create a successful trading method or system all you are really doing is looking to find something that recurs in the market on a regular basis that will result in a particular movement or motion in the market a high percentage of the time. If you can find even one thing, a cause and effect, as this cycle is repeated over and over again, the result should be the same each time or at least very similar. It does seem as though if you can get a computer programmed to recognize this recurring event each time it occurs the result should be the same over and over again.

The benefits to doing this are numerous; it takes out the human error and also the human intervention. If you can remove the trader you can remove their mistakes and their views and opinions leaving only empirical data, which is based solely on numbers and indicators. Regardless of if traders or investors want to admit it or not we all have biases and certain idiosyncrasies’ when it comes to the markets and we all have our own particular view of the markets. If we can remove the humanness it does seem as though we may be better off. Having a machine unemotionally recognize our trade setups implementing them for us on an unemotional, unbiased and non-thinking basis can only be a good thing. It can also work for us tirelessly regardless of what we have going on in our lives. We can go to a full time job; we can go to family functions and social events or just sit around watching TV while the robot fills our bank accounts with money.

I’m sure that this is a fantasy that just about every trader has had at one time or another the only problem with it is that in reality it just doesn’t seem to work. There is so much energy that people from all over the world place on money, both good and bad, that the energy almost has to transfer to the market instruments that are being traded. This is possibly truer in the currency markets than any other market but trading stocks is all about win/lose on each trade which is actually profit/loss so the same concept is prevalent. Each person that participates in any of the markets has their own relationship with money which can add a positive or a negative charge to it. Have you ever met or observed someone that is having financial trouble and it doesn’t seem as though they could earn a dollar if someone gave it to them versus someone that doesn’t even think about it and money seems to find them wherever they go? Their relationship with money is the direct result of how much of it they attract or repel.

If we each have our own attitudes, opinions and relationships with money then we invest in a market with a cash account with all of the other people in the world that have their own relationship with money and attitudes about it the market cannot help but to nearly have a life of its own almost becoming a living breathing entity. This life of its own concept is the reason that I believe that the whole idea of having a successful robot trade for you is virtually impossible over an extended period of time. If the market has everyone’s energy that trades in that market projected on it the market will not stay the same, it will have to change as our attitudes change and different people enter and exit the market.

Oddly enough this is where the human element actually is a benefit because a human being can recognize when the markets change and begin to act differently. If a human being is doing the same thing over and over in the market and all of the sudden whatever they were doing stops working, works but not as well or begins to work better this is a notable change that a person can adjust for where a robot cannot. I believe that a robot will actually work well for implementing trading but only for a given period of time which I do not believe is that long. The more complicated the method that the robot is looking for gets the shorter the timeframe of its success is likely to be. Just as you cannot treat another human being the same exact way all the time with no expressed emotion you cannot expect to treat the market this way either. How a person will act and react under the same or similar circumstances changes over time. The market changes too, which is why robots may work at given times, but not all of the time or for extended periods of time.