Home—Online trading—Spread betting explained—Spread betting blog—Anatomy of a failed trade
Dec 19, 2012, 12:07
Posted byJohn C Burford
On Friday, I left you with an exercise to find a possible gold trade and I hinted you should look for tramlines operating. This is always my starting point when I look at a chart.
If I can also find appropriate Fibonacci levels and possibly authentic Elliott wave labels, then I probably have a great trade on my hands.
Today, I will give my interpretation of a gold trade that actually failed, but illustrates proper use of my money management rules. But it is not pretty.
OK, this was the picture on Friday morning:
(Click on the chart for a larger image)
I noted the A-B-C pattern in the wave leading up to the A? label, so this was a possible top before the market resumed its decline.
But I had an equally valid forecast that said we could see a higher wave C? top in the $1,730 region.
It was then that I posed the question: If bearish, where would you enter a low-risk trade?
By the close on Friday, this was the scene:
And right away, with the superb prior pivot points (PPPs) (red arrows), there is a very solid upper tramline. The lower tramline was similarly easy to draw, as it contained the two lows.
So the trade was: go long near the lower tramline with a protective stop just under the line in the $1,685 – $1,690 area. That would give you a low-risk trade of less than 100 pips.
But on Monday, the market broke below my tramline:
Of course, if without a position at that point, you would be tempted to take a short trade on the tramline break.
But if you were long, you may or may not be stopped out on the move down to the low of $1,686.3, depending on where you had your stop.
This is a vivid illustration of the spikiness of gold. The market gave a false breakout and embarked on a rally back between the tramlines, thus trapping the short trade. Meanwhile, the long trade was similarly stopped out on the false breakout. Ouch.
Trading is not an exact science, and neither is stop-loss placement! In this case, if you had either the original long trade or the short trade working, both trades would have been losers!
But this false breakout is a signal that all is not right with the bear case – at least in the short-term. So at that point, I was looking for another long trade. What cannot go down must go up, surely?
On Monday, I had a closer look at the hourly chart for more clues:
Right away, I spotted a good looking down-sloping tramline pair (in red) with Monday’s low sporting a nice positive momentum divergence (green bars).
That was enough evidence for me to look for a long trade – and my suggested $1,730 upper target then became a distinct possibility.
I was looking at a long trade in the $1,700 area. But where to place my stop?
I reckoned that if this was another false breakout, a move back below my red upper tramline would indicate this. So I gave the trade a 60 pip stop.
That was a good decision! The market topped yesterday and roared back down below the Monday low:
That was the second false breakout on the trot! And two losing trades. Talk about being whipsawed. This is about the cruellest thing a market can unleash on a trader. Many traders would throw their hands up in disgust – but that would be the wrong reaction, and here is why:
As the market came back down under the upper red tramline, it was obvious that my $1,730 target was rapidly receding from view and the market really did want to decline. This action was a clear signal that the budding rally was in trouble.
Claim your FREE report: The six-step game-plan for
spread betting profits
When the market does not behave as it ‘should’, then it pays to examine the opposite conclusion. Flexibility is a key quality for swing traders.
So, I had two choices - jump on board the downtrend, or wait for further developments.
As it happened, the decline was quick and big. It took the market right down to my third tramline and is currently bouncing around it.
Of course, in hindsight, everything looks obvious doesn’t it?
So how does this latest action fit into the bigger picture? Does it give me clues on which side to trade from now on?
This is the daily chart and shows my Elliott wave labels off the $1,796 top.
The larger waves 1 and 2 (green lines) have given way to the current wave 3. From this wave 2 top at $1,754, I have a smaller wave 1 down and the wave 2 up (purple lines), and am currently in wave 3 down.
This means we are in two third waves of two different degrees. I can say this because with the move yesterday below the November low at $1,670, I can safely disregard the view that there’ll be further consolidation.
So Elliott wave theory gives me a clear roadmap for the future - a rapid continuation of the two third waves. This poses a dilemma. Because asset prices are being supported by changes in liquidity, markets have been joined at the hip for several years. When stocks rally, gold, oil, copper, grains all generally rally.
But lately, US stocks have been moving sharply higher since mid-November, while gold has been in a steep decline. With promises by central banks to expand the money supply (or liquidity), why has gold not responded by moving towards the widely-forecast target of $2,000? It is actually moving away.
The US stock price/gold price ratio, which has been in a steep decline for years, has rallied quite sharply of late. Is this indicating that inflation will finally take off, thereby benefitting equities more than gold?
And with bond yields now on the rise, the fixed interest markets are pointing in this same direction.
In my last article of 2012 on Friday, I will have a surprise or two for you… along with an early suggestion for a New Year’s resolution.
• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together
• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just
sign up here
. If you have any queries regarding MoneyWeek Trader, please contact us here.
Published in Spread betting blog
More articles by John C Burford
By John C Burford, May 24, 2013
By John C Burford, May 22, 2013
By John C Burford, May 20, 2013
By John C Burford, May 15, 2013
Leave a comment
(19 December 2012, 04:34PM)
Complain about this comment
Once more you are proven completely wrong. tramlines are a joke, gold/silver market is manipulated to the bone and any attempt to analyze makes the market makers smile.
(19 December 2012, 05:24PM)
Complain about this comment
John,I feel your long term stance of overall bear stocks/euro is about to change-ouch!!
(20 December 2012, 03:06AM)
Complain about this comment
We may possibly have seen the tops in a number of markets yesterday. I've read this column since it started and John is right far more often than wrong.
(31 December 2012, 08:09PM)
Complain about this comment
John....if you get more desperate with those ridiculous Elliot waves you will be into astrology. Yes , all systems fail from time to time so please dont try fitting waves to charts that are clearly figments of your imagination as this tends to undermine the excellent comments you normally make .
This will be the name displayed with your comment.
This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
The trades on this blog are all 'closed', past trades. These aren't trades for you to copy, they are there to teach you some useful trading tactics for your own spread betting. And always remember: spread betting carries a high risk to your capital as you can lose more than your original stake.
Cut through the trading jargon with MoneyWeek's easy to understand guide to spread betting terms
In his easy-to-understand video tutorials, John C Burford outlines some of the essential concepts you need to know to become a successful spread better
24 May 13
22 May 13
20 May 13
Compare the leading providers' online trading accounts for spread betting, forex trading, share dealing and CFDs, and open an account online. Plus, get MoneyWeek's tips and advice on trading online.
Copyright © MoneyWeek 1999-2013. All rights reserved.
Registered office: 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ.Registered in England with company no. 04016750 and VAT no. GB 629 7287 94. MoneyWeek and Money Morning are registered trade marks.