Gold Analysis – “Hovis Trader Style”

Lets take a look at the Gold market.

I don’t look at fundamentals, of late a lot of talk about QE has been banded about – as with everything to do with Investing I find that every decision is based on our beliefs and assumptions whatever market you are trading/Investing.  Most people belong to the buy and hold camp probably because the long-term nature of all markets is to rise and grow, what most people don’t do is work out that although markets grow over the ultra long-term, at stages during this growth they stagnate and move sideways or downwards – it just so happens that over the ultra long-term growth in the markets can be backed up by fundamental analysis.

However, the intra-week swings can’t be backed up by this, but still the media try their best to attach news to the swings – one days its QE, the next its GDP figures moving price, I bet if you read 2 different media articles they’d often contradict one another as to the “reason” for a move – this is also true of ANY market

Lets take a look at a plain Gold chart  over the past year and a bit (June 2011-Nov 2012)

People In August 2011, still believed in Gold and those that bought at the tops are probably still holding on to it, probably not any futures holders as they’ve probably gone to the wall the following month during the decline.  Anyway the cold hard facts are that since the top in September 2011, Gold has yet to recover – regardless of the economic, political or fundamental reasons for it doing so.

This is why I trade, I’m not clever enough to know when the right time is (and neither are the people who sit through a 20% decline! unless they’d get out @ the top and back in again at the bottoms – making even MORE money) and I know that buying and holding will not live the way I want to live (by making a living from the markets).

Look at the chart of Gold, I’m pretty sure that during that period of time shown on the chart, Gold has thrown virtually everything at the Investor – A Top, a Bottom?, Uptrends, Downtrends and Sideways trading zones.  If you remember from the 1st few lessons in Market Education, there is no way to know for certain what a market is going to do – no way at all.

So how the hell do we make money from Trading/Investing in Gold?

Remember long-term buy and hold Investors barely break 10% average profit pa over numerous years, so for a start 10% will be our minimum target, but Ideally we want 20-30% out of this market in 12 months

To obtain this we have 3 simple rules:

  1. There has to be a trend – defined by rising or falling 8/21 EMA’s
  2. The Trend HAS to be backed up by Trend confirmation by the DTF (Coloured lines in the Indicator window)
  3. We ONLY enter a trend following 1 & 2 when  the DTosc makes a reversal from the BUY (20) or SELL (80) zones

Entries via the 1BH/L system and Stops are always 1 tick below or above the low/high@ entry – i.e. If we are going LONG, the Entry will be 1BH and the Stop will be 1 tick below the LOW when the DTosc made a bullish reversal.

What about the Target?  Remember Market Education lessons? There is no accurate way of knowing exactly when a market will give up the ghost and reverse – This is entirely up to you how you take profits – for this what we’ll assume is that we’re looking to make as much as we risk 1:1 – with NO fancy money management techniques for this example, let’s keep it simple.  We’ve an account of £25k and every trade we risk 1% (£250)

For sake of argument we will always risk £250 to make £250 – this will obviously be changed and applicable based on your personal risk management rules – to make more money in this market you would have to trade more frequently (which you can’t because we’ve traded the max possible according to our rules) or increase the £ risked per trade (Leverage)

On the chart I’ve marked ALL the valid trades with Arrows

There were 05 Buy Entries

06 Short Entries

11 Trades in total

With 02 Failed entries =   81% accuracy

2 failing trades @ £250 = £500 lost

9 Winning trades @ £250 = £2,250 Won

To be fair In February 2012, there was a valid trade that would have worked out but the DTF had turned red so sticking exactly to the rules of this example I’ve not included, but in real life I would have taken the long trade as the 8/21 EMA lines were still positive and bullish – if the 8 EMA had been close to the 21 EMA I’d of accepted the DTF bearish warning.  Adding the DTF helps to make this strategy safer (In real-life I don’t use the DTF, I only use the 8/21 EMA’s)

If you look at Golds current position based on this analysis, you will notice that the DTF is RED = bearish, the 8/21 EMA is Bearish and the DTosc is now moving into the SELL zone, so any day we should have a new SELL signal – what will it do?  I don’t know, but based upon past probabilistic activity using the same criteria we know that we have a trading EDGE over the market that should work out.

I know we’ve only been applying this on a 1:1 R:R – If I had applied a 1:2 R:R using this technique then most of these successful trades would not of worked out as often the market failed to reach a 1:2 target – just because a 1:2 R:R would have suited what we wanted out of this market does not mean that the market will give it to us!  I mention in the videos that you have to take what the market offers you and with this strategy that is what it provided us with.

Here’s the stats:  9 Trades resulted in a 1:1 R:R = £2,250

6 Trades resulted in a 1:2 R:R = £3,000 (5 losing positions = £1,250) = Net £1,750

5  Trades resulted in a 1:3 R:R = £3,750 (6 losing positions = £1,500) = Net £2,250

Theres a lot of fancy money management things you could do but this example has chosen to keep it simple – If you look at the chart you will notice we started trading in October 2011 – the 1:2 winning trades did not start until MARCH 2012 (same for the 1:3 winners) only YOU can decide if you can stomach waiting that length of time.

Also we can see that the 1:1 AND the 1:3 returned the same £ amount to us but with differing win:loss ratios – again personal preference will decide which you are comfortable with.

In all honesty this example is fantastic as it depicts not a TRENDING market, but a SIDEWAYS moving market.

In these types of markets the Buy and Hold investor generally make 0%, as you can see we’ve made 9% of out TOTAL trading account – in a non-trending, sideways moving market – If we had risked 2% of our account instead of just 1% we would have made 18% and 3% would have made us 27% – This is where confidence in the indicator comes in, if you’ve gone back over years of charts to test this out you’ll know how confident you are in the indicator and these sort of trades won’t be a problem to take.

To make this clear – we have made many % of golds share price, but more importantly we have made 9% of our TOTAL trading account – if a Buy and Hold investor has £100k Inve3stment Portfolio, they might have say £30k of that £100k invested in Gold – so if they make 10% from gold that only amounts to a 3% gain on their Investment Portfolio – yes we’ve traded more, but we’ve been sat in cash far longer = safer, but more important AND this is crucial at any one time all we have had at stake is 1% of our trading account, the B&H investor has had ALL the TIME 30% of their account at risk – If this market tanks by 50% I’m down 1% and the B&H is down 15% of their account and the B&H investors think their ways the safest!  This is why I’m a trader and NOT a Buy and Holder – control!!!!!

You should be able to see that you will have to trade 10-12 markets employing this strategy and take every single trade given.

If you are at all concerned by your Indicator and its effectiveness, just go back as far as you wish (min 3 years) to see how it fares, during that time you should have come across every type of market condition that exists, make notes on the chart and create a table to see how its fared – you can then build a trading set-up from it.

If any of this is new to you, please refer to my Market Education videos in the Blog Posts section – they reveal ALL to you.

Take a look at this next chart, I’ve gone back in time so that you can see what happens during a predominately TRENDING market – remember it is 100% Impossible to predict a trending/non-trending market – Impossible.

All the relevant detail is on the chart – exactly the same parameters 1:1 R:R £250 etc

6 Winners @ £250 = £1,500

3 Losers @ £250 = £750

So we’ve had a 66% Win:Loss in a bull market, the buy and hold investor would have beaten us hands down in this type of market – they wouldn’t of got in right at the low, but lets say they got in @ 1150, they’ll still be holding at the top of the chart (@ 1370) = 20% rise!  Way out performing us, BUT, we’ve got more control and  our trades have been from precision analysis of the market – yes resulting in more work than our Buy and Hold friend, but we constantly BANK our money whereas their just holding onto it and will end up losing what they have should the market fall massively.

By risking 3% of your account in this type of market you’d of performed just as well

You can use multiple markets to obtain your desired annual gain not just one – using the same principle or using highly geared options for a much greater gain for the same £ risk.

Now the principle we’ve used in this example was very very cautious, in my opinion, but extremely logical, there were a few more potential trades if we’d of added another criteria to this set-up but I’ve kept it simple.

Let’s quickly look at the mathematics, It can be seen we have approx 9 Trades per year using this method, this is obviously less than 1 trade per month – I’m happy to have 4 trades running in sync at the same time on 4 different markets, this means that you would be looking to make £750 per month based on 4 trades per month risking £250 per position = £9000 per annum Profit – now, this is based upon your account size and risk tolerance, but what if your account size permitted risk of £1k per trade?  You’d be looking at £3k per month = £36k per annum (you will need to alter figures to suit your circumstances)

What if you traded 10 times per month risking £1k per trade based on a 80% win:loss ratio (we’ve seen it can be done!) that’s £8k per month profit and £96k per year.  so If you’ve a £100k account value, this is one of the ways you obtain nearly 100% growth – by only risking 1% of your account size per trade – increase the number of trades you take.

Obviously by tweaking the system to obtain 1:2+ Risk:Reward you don’t need to trade as frequently or you can afford to risk LESS per trade – choice is yours!  From a probability point of view it is easier to obtain a 1:1 than a 1:2 R:R – play around with the figures to suit but always remember that the market will only give up what it does and you can’t force out what you want or need, which will often mean letting a profitable trade run to 1:1.9 – you holding out for 1:2 return and then the trade reverses to a losing trade!  It does happen

Remember we have no way at all of knowing for certain what a market will actually do, if we did then we’d all be achieving 100% ratios and it just does not happen (well not to active traders anyhow)

As we stand right now the Bears are in control – they’re forcing the daily chart down (confirmed by 8/21 EMA being bearish), they are also making the weekly 8/21 EMA’s narrow but these are still bullish, the weekly 8 DTosc is Bear OS and the daily 8 DTosc is Bearish – this suggests further downside pressure – but it should be limited, when it gets to this stage its often best to just wait and see what actually unfolds following the next Bullish reversal on the daily DTosc as the Bullish side still has the odds with it (so far).

IF following a 8 DTosc Daily Bullish reversal price action is strong, then I’ll be looking for a DAILY 8/21 EMA fresh cross @ which point I will go long, IF this move fails and price action is weak (following the 8 DTosc Bullish Rev) then I’ll be looking to short this market following a Bearish DTosc rev for a 1:1 R:R

I’m hoping you’re seeing how crucial and effective getting the right % to risk per trade is and that If you only plan to risk 1% of your account per trade then you have to trade multiple markets if operating a 1:1 R:R trade plan.

Hope it’s of use – obviously this style will not suit all.

The Hovis Trader

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  1. Reblogged this on latestriches.

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