Articles
Should You Be Concerned About the Lack of Leadership in Gold and Commodities
Yesterday the DOW fell over 100 points and the S&P fell 14 as the market has had its first encounter with resistance(the 1/3 retracement level and December lows) since it bottomed the other week.
Today futures are in the red as I write this, with S&P 500 futures down 5. If the market is weak in the first half of the day then its 60 minute stochastics will get oversold.I don’t see much more downside if the market falls today.Yesterday I talked about the sectors that have been leading this rally.Today I want to focus on the sectors lagging, with a close look at gold stocks.
I use TC2007 to study the market and find stocks to buy. TC2007 breaks the market up into 239 sectors so that I can track how the sectors behave relative to the rest of the market and each other. The above is a sort of the performance of the worst performing sectors, with their return, since January’s bottom.
As you can see the stocks in the bottom 9% of performance since the bottom include silver, gold, drugs, and health care stocks. Oil stocks are also lagging, posting a ranking under 30%.
The gold and health care stocks were actually leading the market in the first few weeks of January. Normally in bull markets sectors that lead towards the end of a market decline become leaders on the next rally. But in this bear rally this hasn’t been the case, as a lot of beaten down and heavily shorted sectors have been leading. This is classic for bear rallies.
I’m growing more concerned about gold stocks. Last Friday I got stopped out of my gold stock positions, as reported in WSW Power Investor, and today gold is trading under $15 an ounce. Many gold stocks are going to gap down and actually be in the negative from where they opened up at on the January bottom. At the moment gold stocks are very oversold on a 60 minute chart. They also are trading on their lower 10-day bollinger band, which is an important support area. Support on the XAU is currently at 179. If the XAU can close above this level today then gold stocks will be set to bounce over the next week. We should then see the XAU bounce back up to the 188-190 area. However, if the XAU closes below 179 then you can expect a drop to the 170-174 area.
I’m hopeful that gold stocks can bounce here, because the broad market should find a new footing today or tomorrow morning.
I’m long-term bullish on gold stocks, but it appears to me that they are eventually going to have get in trouble with the rest of the market. Once this bear rally in the broad market ends I expect gold stocks to correct hard - harder than the rest of the market. I see them falling hard in the spring, and making a new bottom in the summer. At some point gold stocks will break away from the broad market and have a massive rally, but this doesn’t look like it is going to happen over the next few months. Perhaps in the Fall or in the 4th quarter, but right now all signs point to them having a big correction in the 2nd quarter.
In the first half of January gold and silver stocks rallied sharply. However, other all other commodity stocks dropped. The CRX index, which is heavily weighted by base metal and oil stocks fell while the gold stocks went up and began to underperform the S&P 500 in January.
What this means is that in the commodity complex leadership narrowed to only gold and silver stocks. Gold was the only commodity still making new 52-week highs in January. The other commodities have looked weak for weeks and appear poised to correct over the next few months. If they do it looks like they will take gold and gold stocks down with them for a temporary 3-6 month correction.
At the moment I think the broad market can hold commodities and gold stocks together for the next 4-6 weeks. But once the broad market tops I expect to see a brutal correction in commodities and gold stocks.
The Chinese stock market also appears to have made a major top. Remember back in December how I made note of how the 150 and 200 day moving average begins to slope down when a market makes a major stage three top? Back then I told you how the major US indices were doing this and warning that they were entering bear markets. Now China is doing the same thing. For the past three weeks the Chinese stock market has been lagging the US.
Last year the market was led by commodities, Chinese stocks, and tech stocks such as Google, Yahoo, APPL, and RIMM.
In the past few weeks we have seen major breakdown in the tech stocks that led the rally last year. This month Chinese stocks and commodities stocks have broken down. The sectors that led the market last year are all breaking down and are now lagging during this bear rally. Gold stocks were also leading the market from August to just now. They appear to have lost their leadership and are poised to breakdown just as the tech stocks did.
The weakness in Chinese stocks is particularly ominous for gold stocks, because gold stocks have been more closely correlated to Chinese stocks than to the S&P 500 over the past few years. The same can be said about gold stocks and energy stocks.
When you take a look at gold stocks they also are badly lagging the metal. Even though they made new 52-week highs early in January they underperformed the metal when they did so. This is important, because usually the XAU/gold and HUI/gold ratios lead gold and gold stocks. It is bullish when gold stocks outperform gold and when they both go up and gold stocks lag that is a powerful negative divergence that usually spells some sort of top being made.
I do expect the broad market to continue to rally - and expect that rally to keep a bid under gold stocks and commodities.But once the broad market tops, and I expect this to happen in March, I think we will see a big 25-30% correction in commodities and gold stocks. The Chinese stock market is likely to fall 40-60%! If we get such a correction I look to see the XAU bottom in the 130-145 area.Right now though it has support at 179 and 175. It should put in a bottom there for the next 4-6 weeks. A rally back up to the 190 area would be a good place to lighten up on positions.I know most of you are heavily involved in gold and silver stocks. Take this posting as a warning sign and discussion of what is happening in the market right now. Maybe the underperformance of gold stocks in comparison to the S&P 500 and the gold metal is just a temporary phase. However, if they are continuing into March then you should take action on the warnings in these charts that I’m bringing to you today.
I’ll close with this graphic. Compare it with the chart of the Chinese stock market above:
by Mike Swanson
http://www.wallstreetwindow.com/
A Sneaky Way to Steal Someone Else’s Forex Trading System
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Anyone who is serious about trading needs to have a Forex Trading System that is tailored to them, but there is no reason to start constructing your Forex trading system from scratch. Why try and reinvent the wheel when you can benefit from other traders years of experience and borrow your trading system’s ideas and concepts? It’s easy to do, and there are some pretty good Forex trading systems out there for you to work with. Some of them are free and some are very expensive, but the price tags don’t always reflect the actual value of the Forex trading systems. But, many of these systems won’t work for you, and I am not talking about out-right dishonesty here, which can be a big problem when trading. What I am talking about is your ability to effectively trade with the system that you may be considering using or buying. You need to use a system that matches your life style and personality. If you have a day job (not trading), a Forex Trading System that requires you to stare at a screen all day wouldn’t be appropriate. You would be distracted at work and miss the opportunities to make money, or even worse, you will not close a trade effectively and could lose money. Some Forex trading systems have a potential to lose 20, 30 or 40% of your money before they are profitable. Can you handle a system that can drop your trading capital to half before making money? Or, are you prepared to have a string of 8 to 10 loses in a row before you have a winning trade? Some of the best traders in the world lose money on more than 50% of their trades. These are all important points to consider when you are creating your Forex Trading System. Choose aspects of the different systems that are out there that fit your trading style best, and then build your Forex trading system. An excellent trading method, which was made famous by Richard Dennis and William Eckhardt and is sometimes referred to as Turtle Trading, is one of the best Forex trading systems that I know of. They get returns in excess of 20 to 100% per year using this system. But, could most traders trade their system? Not a chance! Dennis and Eckhardt also loose on over 60% of their trades. Once you know what sort of Forex Trading System will work best for you, look at the components that make it work. Face it; if you are a new, or even a fairly serious, trader how likely are you to come up with a totally new concept? There are some very smart and wealthy traders out there. Why not use their ideas. Consider Dennis and Eckhardt’s turtle trading, their system is based on a "breakout" method. I know most traders could not trade using their exact method, but they could take parts of it, such as the breakouts, to confirm a trend. You can also use other Forex trading systems to give you an outline of what parts a system has to have for it to make money. All great Forex trading systems have these three basics: 1. Entry Rules, 2. Money Management Rules and 3. Exit Rules. Study and learn from the Forex trading systems out there, borrow their concepts, and steal their ideas. It will put you on the track to the system that will make you a successful trader. by David Jenyns |
The Sneaky Way To Managing Losses In Your Forex Trading
One of the cardinal rules of Forex trading is to keep your losses small. With small Forex trading losses, you can outlast those times the market moves against you, and be well positioned for when the trend turns around. The proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position. The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading float, a string of losses won`t stop you from trading. Unlike the 95% of Forex traders out there who lose money because they haven`t applied good money management rules to their Forex trading system, you will be far down the road to success with this money management rule.
What happens if you don`t set a maximum loss? Let`s look at an example. If I had a Forex trading float of $1000, and I began trading with $100 a trade, it would be reasonable to experience three losses in a row. This would reduce my Forex trading capital to $700. What do you think those 95% of traders say at this time? They would reason, "Well, I`ve already had three losses in a row. So I`m really due for a win now."
They would decide they`re going to bet $300 on the next trade because they think they have a higher chance of winning.
If that trader did bet $300 dollars on the next trade because they thought they were going to win, their capital could be reduced to $400 dollars. Their chances of making money now are very slim. They would need to make 150% on their next trade just to break even. If they had set their maximum loss, and stuck to that decision, they would not be in this position.
Here`s a perfect illustration why most people lose money in the Forex trading market. Let`s start out with another $1,000 float, and begin our Forex trading with $250. After only three losses in a row, we`ve lost $750, and our capital has been reduced to $250. Effectively, we must make 300% return on the next trade and that will allow us to break even.
In both of these cases, the reason for failure was because the trader risked too much, and didn`t apply good money management. Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits. With your money management rules in place, in your Forex trading system, you will always be able to do this.
by David Jenyns
http://www.earnforex.com
http://earnforex.blogspot.com
Too Many Strategies, But Still Frustrated?
It is not too long ago when veteran traders used to draw trend lines using pencil and paper. Market data was sent by physical mail to them and there was no computer and trading desk. Were they really not able to perform by not using super analytical charting platforms? Were they all losers?
I bet they were not only doing great, but compared to my fellow traders (Including me) they were absolutely sophisticated traders. I don’t want to undermine anyone as we have many legend traders and hundreds of good traders who actually make money around the globe on daily basis.
My argument is merely pointed at those traders who think that broken accounts is a result of them not really having the best strategy to trade in a safe and secure manner while at the same time having a one year outlook for reaching 1 million dollar, through a 10000 buck trading account.
Where a trading strategy is introduced as a reliable method of making money for traders, there are some questions that must be asked, to evaluate the accuracy of the given strategy:
- Is it a trend or a range market based strategy?
- If it works as a trend based strategy, what can the strategy offer to trade around range markets, and vice versa for the range market based strategy?
- Is it a day trading strategy or planned to signal longer term trading signals?
- If it is an Intraday trading strategy, how many hours are required and when exactly should I sit down and watch the screen?
- If it is a long term strategy, what is the estimated possible drawdown in pips?
- Is there any historical performance of trading using the given strategy in real accounts and if the answer is "YES" for how long? (don’t rely on less than one year)
- Are there any money & risk management rules attached that are specifically tested on this particular strategy?
- What is the average/highest/lowest risk to award ratio of the last year’s trades?
- Is there anyone who has used the strategy on a real account? (Be aware of marketing tactics and ask someone who is honest).
- What is the outcome of the trades for the above mentioned trader? Even if positive, don’t necessarily trust that exact approach for yourself, because one cannot fit a common strategy with the same characteristics to every trader. In this case you need to test it yourself.
- Ask the developer about the psychological pressures that may come upon you while using that strategy on real accounts (We recommend to ask your mentor to analyze the strategy)
- Does it have an Exit and Stop Loss rule for different market situations?
- Ask the developer if you can get back to him occasionally to ask questions about some points that you don’t really understand (don’t make it 100 times a week cause he/she won’t sell any strategy to you).
However, I know a couple of guys who experienced real damage and disappointment where they tried to believe the strategy given to them from the first day. So I am being serious when I say don’t ever try to apply a new strategy on your real account, unless you have met an expert and he has given you the green light, or if you have just passed one year of continuous testing.
Final Words:
You may ask for how long? One year… it’s too much…I can’t wait…!! Well then you can try it, but count on it as a gamble…You know the gamble…Too many jack pots, nothing Hot Shots.
Let science make you wealthy step by step. Don’t ever think you are smarter than any other trader because no one knows what is going to happen next. So it’s better to be next to those wise traders who win, because they are disciplined and have spent a long time practicing before doing anything real on their money. Try to admit it if you are not sure enough about your ability, and try to solve the problems with patience and remember it is worth it if you make that million dollars three or even five years later, instead of losing what you got from hard work within just a couple of days.
Also, not to forget, forward any questions you might have on this article to my email address s.a.ghafari@iftc.ir and I will try to respond as soon as possible.
S.A Ghafari
FX Analyst
s.a.ghafari@iftc.ir
http://www.iftc.ir
The Properties Of Price Movement
You might look at the stock prices at the bottom of your television screen or, if you are trading currencies in the forex market, you might look at the exchange rates go up and down your computer screen.
Prices move and you wonder whether their behaviour means something. Could the market be sending out signals that you can use to make your decisions? How, exactly, are you going to study the market?
For anybody to make money from the market, they must have a way of studying it. There are predominantly two approaches: fundamental and technical.
Fundamental analysis focuses on value but this is the subject of another article. Technical analysis, on the other hand, focuses on price and its movement.
The movement of price has the following properties which traders can study to aid in their decisions:
1. Trend - its persistence to move in one direction,
2. Volatility - the magnitude of its fluctuations on a periodic basis,
3. Momentum - the rate of its acceleration and deceleration,
4. Cycle - its tendency to move in cyclical patterns, most especially in the futures market,
5. Market Strength - the number of transactions supporting its movements,
6. Support and Resistance - its tendency to rise or fall to a certain level and then reverse, repeatedly.
Analysts, using the technical approach of analysing the markets, have developed their own set of indicators, different to those used by fundamental analysts. These indicators are used to measure the properties of price movement.
Fortunately for modern-day traders like you, you do not have to devise your own tools. You just need to learn how they work and how to use them.
About The Author:
Marquez Comelab is the author of the book: The Part-Time Currency Trader. It is a guide for men and women interested in trading currencies in the forex market. Discusses analysis, tools, indicators, trading systems, strategies, discipline and psychology. See: http://marquezcomelab.com
FOREX: Exiting positions at a right time
The presented article covers one of the most important (in author’s opinion) aspects of trading in general and Forex trading in particular - managing of orders and positions. This includes choosing entry points, making decisions about exit points, stop-loss and take-profit of the trader. I hope this article will help new traders, who just began to work with Forex, and also to experienced traders who trade regularly and regularly make or loose their money to the market.
When I started to trade Forex and made my first big losses and profits I began to notice when very important thing about the whole trading process. While the right time to enter a position was rarely a problem for myself (nearly 80% of all my open positions had gone into the "green" profit zone), the problem was hidden in the determining the right exit point for that position. Not only was it important to cut my risk on the potential losses with stop-loss orders, but to limit my greediness and take profit when I can take it and make it as high as I can.
There are many known guidelines and ways to enter a right position at a right time - like major economic news releases, global world events, technical indicators combinations, etc. But while the entering into a position is optional and trade can decide to miss as many good/bad entry point moments as they wish, this is untrue if we talk about exiting a position. Margin trading makes it impossible to wait too long with an open position. More than that, every open position in a certain way limits trader’s ability to trade.
Choosing the good exit points for positions could be an easy task if only the Forex market wasn’t so chaotic and volatile. In my opinion (backed by my trading experience) exit orders for every position should be toggled constantly with time and as the new market data (technical and fundamental) appear.
Let’s say, you took a short position on EUR/USD at 1.2563, at the time you are taking this position the support/resistance level is 1.2500/1.2620. You set your stop-loss order to 1.2625 and your take-profit order to 1.2505. So now, this position can be considered as an intraday or 2-3 days term position.
This means that you must close it before it’s "term" is over, or it will become a very unpredictable position (because market will differ greatly from what it was at the time you have entered this position). After the position is taken and initial exit orders are set, you need to follow the market events and technical indicators to adjust your exit orders. The most important rule is to tighten the loss/profit limit as time goes by. Usually if I take a middle term position (2-4 days) I try to lower the stop and target order by 10-25 pips every day.
I also monitor global events, trying to lower my stop-losses when very important news can hurt my position. If the profit is already quite high, I try to move my stop-loss the entry point, making a sure-win position. The main idea here is to find an equilibrium point between greed and caution. But as your position gets older the profit should be more limited and losses cut. Also, trader should always remember that if the market began to act unexpectedly, they need to be even more cautious with exit order, even if the position is still showing profits.
Every trader has their own trading strategy and habits. I hope this article will make its readers think about such an important aspect of trading as the exit orders and this will only improve their trading results.
by Andrey Moraru
