After more than a year of downward movement on gold, we are starting to see some signs that the price might be heading up once again. As we look at what gold has been doing, it’s clear that the trend is the key factor in knowing the direction we should be trading. Once a clear direction has been established, we will want to take advantage of that momentum. If we would have only shorted gold during this time, we would have done very well with our trades. Currently, we are seeing the chart take some steps in a bullish direction.

Take a look at this chart below:

This is the daily chart of gold going back to August of 2012. On the chart, you can see the red line that is indicating the current downtrend; this trend line is also the area of resistance. As the price moves down and then back up to the resistance area, you can see that the pressure was put back on to push the price lower. You can see that the green circle is the area that shows the price finally breaking up above this resistance line. This would be the indication that the downward pressure is weakening and the bulls are beginning to show some strength.

Take a look at this chart below as we zoom in to look at it a bit closer:

As we have identified a breakout of resistance, we will now focus on looking to trade gold to the upside. We can do this on the daily chart or we can take this info to the shorter-term charts to look for trades. Let’s drop our time frame down to look at the hourly charts. On this chart below, you can see the red line that it broke through to begin to move up. You can also see the green line that has been created as the trend began to move up on the hourly chart. In this case, we would simply look for our trigger to enter a trade based on our buy rules.

The question we need to ask ourselves is, how long will this go up? The answer is, who knows? The important thing to look for is, when will the chart show the trend has ended? You will want to wait for the chart to actually show a break of the support before becoming too bearish. Until then, we will keep looking for buying opportunities in gold.

As we remember the importance of trading with the trend, we will be placing our trades in the correct direction. With gold beginning to move up again, we will want to look for the opportunities to buy. If gold begins to move in a long-term uptrend, we will be happy we took the time to identify this new upward movement. As you apply your trading rules to this, you will begin to see the possibilities of trading gold in this new uptrend. Of course, if it fails, it can always move back down, so make sure you use good risk management in all your trades.

Prepare Yourself Mentally Before Trading
Before the trading day begins, make sure that you are in good “trading shape”. Do you get a good night’s sleep, are you in good physical condition, and are you overly stressed about any personal matters? How you feel physically will affect your mindset and trading psychology, which will affect your performance during the trading session. So get plenty of sleep, eat well and get some exercise. Your body will feel better and you will be much more mentally focused on your trading. If you are ill or not feeling your best, consider skipping the trading session. I talk to traders all the time who say they knew they were in no condition to trade, but did so anyway. It takes discipline to know when not to trade!

Follow Your Entry and Exit Rules
Whatever your rules are for entering and exiting trades, make sure that you have them written down, that you have gone back and tested them against historical data, and that you have paper traded the entries and exits (forward testing). Testing your system rules will build your confidence in the rules and the outcomes, allowing you to be more patient with your trading and calmly execute the trades without second guessing each and every decision. Once you have confidence in the rules, follow them!

Follow Strict Risk Management Rules
There is no “Holy Grail” system in trading! You are going to have some losses – it is just going to happen and the better you are about taking losses, the better your discipline will be. Therefore, it is important that you have and follow good risk management rules to limit your losses. If you can understand your initial risk and have tested the system, you will have the discipline to take the next trade after a loss, according to your entry rules, without letting your emotions getting the better of you. A good rule of thumb is to limit your risk per trade to no more than 2% of your overall account. Also, it is best to determine the overall risk or the total number of open positions you will carry at any one time. So, based on your risk tolerance, determine your risk rules and then follow them.

Document and Evaluate Your Trades
It is very important to keep track of your trades. Most traders refer to this as a trade record or a trade journal. Almost every trader has heard that it is an important or good idea to journal your trades. However, I am always surprised when I hear traders that do not do this regularly. If you want to get better at anything you do, it is important to keep track of current behavior. For example, most people cannot lose weight until they understand exactly what and how much they are eating by way of keeping a food journal. Trading is the same way – unless we track exactly what we are doing, and more importantly, why we are doing it, we will have a hard time improving. At times our trading record can become just a big blur of executions. So keep a trade journal of all of your trades and why you made the trade in the first place and then what happened to each and every trade.

Conclusion
These four steps will allow you to manage your trading psychology better and allow you to control your emotions, which will lead to more disciplined trading.

Good luck and happy trading!

If you are not familiar with this term, you will most likely hear it some time during your days of trading in the market. This is a saying that refers to the idea of buying when prices are low, then selling them when they have gotten higher. For example, if you buy at $10, and then sell at $20, you have made a profit of $10. This seems simple enough, but sometimes we forget that is what we all are trying to do.

If we understand this saying, the question should be – “How will I know when the price is low and when it is high?” This is a great question and one that we all should be trying to answer. The actual answers should come as part of having an overall, well-defined, trading plan. The trading plan or strategy that you are trading should tell you when the price is low and when it is high. If we have that, we will be better at understanding when to enter and exit a trade.

As we look at better defining this saying, we will recognize that it really becomes a matter of understanding the price action on a chart. As we learn to identify the trend of the chart we are trading, we will be looking at the highs and lows that are formed on the charts. If the prices are making higher highs and lows, then the trend is up. If the prices are making lower highs and lows, then the trend is down. Once we have identified the price action as up or down, we will be able to see when the price is low and when it is high.

Once we have done this, we now know when to buy. We could look at this saying in another way so we can know when to short. It might be turned around and we would sell high, buy low. In this case we would be dealing with the price action trending down. Whether we say it this way or the other, the important thing is identifying the high and low areas.

Another version of this saying is to buy high and sell higher or sell low and buy lower. This would hold true if we are looking at breakout trades where the price may have already made a move up or down.

As you look for these high and low areas, it is important to go back to the basic elements of evaluating a chart. First we look at the trend and the price action occurring, then we look to identify support and resistance in order to know where these highs and lows are happening. Once we have done this, we can follow our rules that will help trigger us into a trade.

If we have our rules and can read a chart, we will be putting ourselves in the best possible position to be successful in our trading. There are no guarantees, but being able to look for highs and lows can put the edge in our favor. Take some time to review this and see how well you do at picking out high and low areas on the charts.

We have discussed using flag and pennant price patterns to identify the continuation of a trend in the market. Now, let’s discuss price patterns that would help to identify or predict a change in direction or current momentum from a current trend.

There are some specific price patterns, which you can use to help identify a market shift or change in momentum from the current trend. These patterns are often referred to as market reversal patterns. While these patterns do not always show up in every market reversal, when they do show up they are very powerful indicators of a weakening trend and a possible reversal.

Head and Shoulder Reversal Patterns
At the top or bottom of the market if you can see a head and shoulders pattern set up with two shoulders and head with a support line called a neckline like the chart below on the EUR/USD. The pattern found in Figure 1 is referred to as an inverted head and shoulders pattern because it found at the bottom of a market in a down trend and is opposite of the head and shoulders pattern found at the top of a market. The neckline is the resistance level at the top of the pattern. The head and shoulders pattern is similar to a triple top or triple bottom but the middle peak is higher or lower than the shoulders level, setting up the head and with the two shoulders and the neckline as illustrated.

Figure 1: Inverted Head and Shoulder Pattern

Double Tops and Bottoms
Double Tops and Double Bottoms are fairly common reversal patterns. These are also commonly referred to as an “M” pattern for the double top and a “W” pattern for a double bottom. A good example of a double bottom or “W” pattern can be found in the current chart of the AUD/USD Forex pair.

Figure 2: Double Bottom or “W” Pattern on the Daily AUD/USD Forex Pair

Triple Tops and Bottoms
In addition to the double tops and double bottoms we have a similar pattern that when it sets up can be a very strong indication and even stronger than the double tops or double bottoms. A good example of a triple top is also found on the AUD/USD Forex pair in the following chart. Note that once the support level at the bottom is broken after three attempts of the price action to move higher and just doesn’t have enough momentum to move higher will often reverse and move lower.

Figure 3: Triple-top with Price Breaking Below Support

Conclusion
These three types of reversal price patterns, head and shoulders, double tops and bottoms, and triple tops and bottoms are useful for helping traders identify the possibility of a market reversal. It is important to understand how these patterns rely on established principles of support and resistance. As illustrated in the charts, for the pattern to be complete, the price action completed, and confirm the pattern by breaking up or down through support at the top of the market or up through resistance at the bottom of the market. Look for these patterns on the charts and see how often they indicate clear change in momentum.

I have heard traders in the past state that the economic news that comes out effects the market very little from their standpoint because they are trading on longer-term charts, such as daily or weekly charts. When I hear something like this, it reminds me of a person driving a car with their eyes closed. I wonder if they are only interpreting a very small amount of the data that is available, if any at all, to base their trade decisions upon. If you look at a daily chart of how the market had been moving through January and into February, a new all-time high was reached in the S&P 500 in the middle of January. But at end of the third week, and into the last week of January, we saw the low of January and the low of December taken out and the first week of February took out the November low. Though this was an impressive few-day drop, it was only a 4.3% retracement, which was less than double the December retracement and about three times greater than the November retracement. The market had retraced in November and December, but not with much enthusiasm.

Taking a look at the week of Feb. 3 though Feb. 7, 2014, the economic data that was presented began on Monday when it was reported that manufacturing output was down for January by a substantial amount versus the amount that was estimated for the month and it was down even more versus what December’s actual number was. This roiled the market and gave it a reason to take a relatively big one-day drop, though some people argued that this manufacturing decrease was likely weather related and not something to be too concerned over. The market was definitely getting jittery, though it stabilized on Tuesday and was very jittery again on Wednesday when bad Non-Farm Employment numbers came out. Again, the argument was made that this was at least partially weather related so it may be exaggerated to the downside.

Overnight Thursday we saw that the UK and the EU both kept their interest rates unchanged and the head of the EU had a press conference and basically stated that they are aware of their low inflation number, but they are not going to rush to change their economic outlook or policy. This information, along with unemployment claims in the US dropping, was very well-received by the market, which managed to erase about 18% of the total retracement since the high was recorded in the middle of January. Thursday going into Friday was a very interesting time because the actual Non-Farm Employment numbers were due out, along with the unemployment rate, but many people were already almost discounting the information, stating that if the number was good, it means that the economy is continuing to improve. But if it is a bad number, it really doesn’t matter much because it was likely weather related. The number came out under expectations, though the unemployment rate still dropped by 10 basis points. The 10 basis point drop looks really nice on paper, but it is probably as much a result of unemployed people leaving the work force, so they are no longer counted as unemployed as much as anything real. This was set up going into Friday to be a no lose situation and the market loved it, regardless of the bad numbers, recovering another 18.6% of the recent retracement. The Thursday and Friday trading days recovered approximately 36% or just over 1/3 of what it took about three weeks to lose.

The point of all of this is that, regardless of the time frame charts that you are trading on, what is actually happening around the world is just as important as what the perception of what is happening is and it does effect trading. From an economic standpoint, were we really better off or more stable between Wednesday and Friday? What transpired in those few days was a bad Non-Farm Payroll estimate, better unemployment claims numbers, and then bad actual Non-Farm Payroll numbers. Was this really enough for the market to justify recovering 1/3 of the previous retracement? I don’t personally think so, but the market is actually people and people have attitudes and ideas; people can speak what they believe into existence and, if enough people speak and believe the same thing, it will happen. From a traders standpoint, you don’t need to be able to explain or analyze it, you just need to know that it’s there so you can prepare yourself for whatever the perception of the truth is, which is what moves the market. It doesn’t matter that there is no real difference between Wednesday and Friday; all that matters is that enough people believe that there is, so the market moved. Look for the prevailing attitude, not logic or reality, and you may be able to ride some of the market waves, regardless if they are real or imagined.

Today we are going to look at the daily chart for silver and evaluate what is going on with the price action. Whenever we look at analyzing what is going on with a chart, we need to look at a few, very important things. All these things deal with the price movement on the chart. One of the things we want to identify is the direction or trend of the current movement. This will give us the general overview of the likely direction we should be trading. If the trend is up, then we will be buying and if it is down, we will be looking to sell. Another thing we want to identify is the current momentum of the price action. This is different than the trend and really shows the shorter-term directional movement. This is usually identified as a retracement, or pullback, on the chart. The last things we will be looking at are where the area of support and resistance are located. We use the term “area” because we know that the support and resistance can have a range that takes effect. Now that we know what we are looking for we can look at the chart for silver.

In the chart below, we can see the daily candles for silver. The first thing we want to do is get a good overview of what the price action looks like.

In this first chart, you can see that we have drawn a downward moving red arrow. This is the overall general direction or trend that is happening to silver. There is also a horizontal red line, which is showing that, although the trend is down, the more recent movement has been mostly sideways. As we look at the charts, we should come up with an overall bias as to the direction of the price so we can know if we are going to be buying or selling. In this chart, our bias is more bearish than bullish.

The next thing we will look at is the current momentum on the chart. In the example below, you can see a green arrow the shows the upward momentum that has been happening over the last week.

This would suggest that, although the trend is down, we might want to wait to short this until the current momentum is slowed. In fact, this upward momentum has moved up to the next topic we need to evaluate – resistance and support. Take a look at the chart below where we have drawn both of these areas on the chart.

By looking at these areas, we can get a better idea of where we might be looking to enter a trade. If the trend is down and we have move back up to resistance, then we can begin to look to short silver as the price begins to move back down in the direction of the trend. We could also be looking for a breakout trade where we would enter once the price breaks above this area of resistance. Regardless of your entry rules, knowing these things we have discussed will help you have more confidence and a better understanding of how you should be trading a chart. Take some time to review this and see if it can help you in improving your chart evaluations.

Today, let’s talk stops. The placing of stop-loss orders is a very important part of a good trading plan. A stop-loss order is an order placed with the broker to exit a trade once a position has hit a certain price level. For example, if you enter an order to buy a stock at $25 and place a stop-loss order at $24, the trade will be closed out once the price hits the $24 level. Now, having said that, it is important to understand that you may not exit exactly at $24, as a market order is initiated once the stop-loss level is reached. Most of the time you will find it will be at, or very close to, the stop-loss level.

One of the advantages of using a stop-loss order is that you limit what risk is in the trade. While there is not a hard and fast rule about where to set your stop-loss orders, in the past, I have discussed risk management, which is really just understanding, quantifying, and controlling your risk to a certain fixed percentage of your overall account. The initial stop is the key to limiting that initial risk in any single trade. If you trade without an initial stop-loss order, you leave yourself completely exposed to market risk. So it is critical to your long-term success that you ALWAYS use an initial stop.

When you look at trading, there are always tradeoffs or advantages and disadvantages to your actions. Another advantage to placing the stop-loss order is that you don’t have to constantly monitor the trade, as the stop-loss order will automatically exit the trade if the trade moves too far against you.

Now, on the other hand, a disadvantage to placing the stop-loss order is that you may get “stopped out” of the trade if the stop-loss order is placed too close to the market price when the order is filled. If you do not allow enough room or space for the stock to move in its regular fluctuations then you may get stopped out prematurely. This is referred to as putting our stop-loss orders to tight for the regular movements in the market. So a good rule of thumb would be to look at the Average True Range (ATR) and look at the normal fluctuations in the market of any particular stock or ETF. For example, if the ATR on a daily chart is 5% then it would be unwise to place the stop any tighter or closer to the market than that 5% or you are more likely to get stopped out. So in volatile market conditions, the loss may be larger than you originally calculated. However, this risk is well worth it, as opposed to the alternative of not having a stop-loss order in place and leaving yourself overly exposed to large market risk.

In conclusion, DO always place your stop-loss order to limit your risk, but DO NOT place it so close as to not allow for normal market fluctuations so you give the trade a chance to succeed.

Today we are going to talk a bit about market volatility and how it affects our trading in the Forex world. As you know, recently we have seen some strong movements on the US stock market. These movements have been mostly bearish, as we have seen drops of over 300 points on the Dow Jones. With this type of movement comes an increase in volatility across the financial markets around the world. When the Dow dropped more than 300 points this week, the Asian Nikkei dropped more than 4%, nearly double the drop in the Dow. In turn, the gold market moved up strongly, as well as an increase in the volatility of currencies. Regardless of what we are trading, we need to be aware of what other markets are doing so we can prepare our trades for this possible increase in volatility.

As we look to trade during these times, we need to make sure we are using appropriate risk amounts for the current market conditions. This might mean that we need to look at reducing our regular risk amount to compensate for the added risk in our trading. It might even mean that we step aside for a bit to let the markets calm down. Whatever it is that we do, we should have it in our trading plan so we know how to react to these conditions.

In addition to the financial risk volatility brings, we need to be aware of the emotional risk that comes with a more volatile market. Many traders can be good at controlling their emotions when the market is nice and deliberate, but they become driven by their emotions when the market volatility increases. This is not a good situation if we are making decisions based on what the market does. We should make sure that we can stay in control even if the market has big moves. Generally, our emotions start to take over when we are taking too much risk so we can help control them by, once again, keeping our risk at an appropriate level.

On the positive side, if we can control our risk and emotions, the added volatility in the market can lead to some good trading opportunities. By following our rules and looking to take advantage of the bigger moves, we can benefit from these trades. As with any trade, we need to know when to exit and not be led astray by our desire to make bigger and bigger profits. Knowing when the trade is bad and when to get out will keep us from having the disastrous affects that can come from trading in high volatility markets.

Since we cannot control what the market does, we need to control what we do with the market. By using good risk management, controlling our emotions, and following our trading rules we will be able to use the volatility to our favor. Regardless of how or what you trade, you will experience high volatility markets, just make sure you are prepared for them and you will be more successful when they come.

Today I’d like to discuss one of the most important elements to trading, which is ‘risk management’. To me, risk management is more important than the trading system that you use, including the rules for entries or exits or trade management. You can have a great system, but without good risk control, you could still be a poor trader because you may risk too much of your account at any one time or one specific trade.

The first thing to understand about managing your account risk is that you should never get into a situation where you are risking your account on just one or a few trades. A good rule of thumb to follow is to risk only about 1% (2% maximum). In other words, risk only 1% of your account on any one specific trade and also limit the total number of trades to a maximum of 10 trades, or 10% total risk at any one time. To do this, it is important that you use proper stop-loss and trailing stop orders when you get into trades. You will be able to sleep well at night, much better knowing that you will never be in an overleveraged position.

Before ever entering a trade, you should determine what that risk per trade is in terms of dollars. If we have a $10,000 account, we can then risk up to $100 per trade – $10,000 x 1%). This will help us determine the position size or the total number of shares to trade or the position size based on the $100 maximum risk. The way to calculate the position size is to calculate the risk per share. To determine the risk per share, we calculate the difference between the entry price and the initial stop-loss level. For example, if our entry price is $25 per share and our initial stop-loss is set at $24 (I believe that a stop-loss level based on support or resistance is better than a predetermined set stop-loss level), based on this example, the risk per share would be $1 per share, so we would trade 100 shares and limit our risk to a maximum 1% for this trade. This will help us limit our risk and not accept more risk than is prudent per trade.

So to review, the keys to limiting our risk are to always determine the max risk you are willing to take per trade based on 1% (2% max), always use a stop-loss to determine proper position size of the trade, and then be sure to limit the number of trades to keep out total risk under 10%.

In conclusion, no matter what you trade or what your trading system is, there is always risk in the market and the key to long-term success is using risk management to control that risk. This will allow you to trade without undue anxiety and will also help to control the trading emotions of fear and greed.

What we are currently seeing in the stock market, with the most recent downward move, is a very healthy and long overdue correction or pullback. We all know that no market goes straight up and no market goes straight down. All markets go up and down, so there is virtually no reason to be concerned about a pullback when one does occur; they can be healthy and we want them to occur. In fact, we need them to occur. We know that they are going to occur, we just may not know exactly when. Though if we are astute, it typically isn’t much of a secret when they may happen.

For long-term investors, riding the ups and downs of the market is no big deal at all. In fact, if they are dollar-cost averaging, the downward moves make for great buying opportunities that helps build up the account over a longer period of time. Regardless of what type of investor or trader you are when the market comes down, it presents a buying opportunity. Long-term investors won’t notice the ups and downs much at all unless they are in the process of liquidating when there is a downturn. But short-term investors and traders can really take advantage of situations like what we are currently seeing and set themselves up to be very profitable in the next market cycle. The next market cycle that I am referring to, of course, is when we reach the end of the pullback and we are able to take a long position and ride the market wave back up.

This is all very easy to say, but the trick is to find the indicator or indicators that will tell you when the moves are likely to occur. Typically, we will not be able to enter the market at its very low-end exit, but if we can take a chunk out of the middle of each trend, we will tend to put ourselves in a position where we are increasing the size of our account on a regular basis, year by year. If we are able to achieve this, regardless of what happens in the US economy and the world economy, it is possible that, in doing so, we may never have a down year in our accounts; the worst annual performance that we may see is even. Being even is not a bad thing and, being in cash, is not a bad thing. Remember the 30/50 rule which states that if you lose 30% of an investment, you have to achieve a return of 50% just to get back to even. Unfortunately, losing 30% is a lot easier than earning 50%.

Long-term investors care a lot less about what price they get into the market because, if they are dollar-cost averaging or reinvesting dividends and capital gains over time, the average cost of their investment will drop, making it easier and easier for the investment to be in the money with a smaller upward move. But short-term investors, to a large degree, make their profit as much when they buy the investment as they do when they sell it, so they are much more sensitive to their entry price. Once we find what we believe is a good place to enter the market, all we are really doing after that is looking for the best place for us to exit, which can be done by using a specific profit target or by exiting the market upon certain conditions being met. If we are looking for a specific profit target or price point, we simply determine what amount of profit is adequate and achievable for us to be satisfied capturing. If we are using a specific event to trigger our exit, other than a profit target, we may be using a specific stop level that we move each day trailing the position or possibly we are using the automated trailing stop that can be found on most brokers’ trading platforms. Regardless of the way we choose to exit, once we exit we don’t ever want to look back and regret the level that we exited at or if we could have captured more profit by staying in longer. Once a trade or an investment is over, it’s over. We need to move on to the next investment. Learning from our past investment management choices is one thing, but regretting them and lamenting over them is something altogether different; this can be very toxic to our trading.