Rising Commodities, Falling Stocks and Risk Reward Ratio
Trading Risk/Reward
The past few months have been absolutely crazy in the financial markets. Financial
advisors and banks are taking a beating from both the market condition and
clients as individuals around the world are losing 30+ of their investments.
We have seen oil prices drop over $110 per barrel from the high (73% decline),
and the US dollar tumbled down to 71 and rebounded to 88 (23% gain) all in
the mater of months.
Risk Management is what is needed if we want to stay in the game over the long term. Follow strict risk/reward rules is a must so that we don't not get caught chasing stocks and funds only to have them turn around on us a few days later.
Focusing on keeping risk low for potential trades is crucial for turning a profit over the long run. In short I look for a basket of indicators including candle patterns and volume to be in favor when buying or selling a stock or fund. When a fund generates a buy signal I wait for a low risk entry point near my support or resistance level depending if I am looking to go long or short. I need to see a perfect setup so that the odds are favoring my side. Only then will I take a stab at the market. The biggest issue with this is that I do miss a lot of good trades, but the key here is that most of my trades are profitable and that is what makes it so powerful. I would rather make 20 trades a year, than 150 trades and make the same profits.
This Weeks Analysis on Gold
Gold continued its push higher last week getting a lot of investors and traders
all excited. The daily chart does look strong and it is currently on a buy
signal. But buying at this level is much too high of a risk. The price of
gold is trading at the top of its 4 month trading range which previously
led to a 20% selloff in bullion. Our support trend line is 10% away from
the price of gold making it out of reach still. I trade reversals when risk
is only 3% from my stop/support price.
Daily Gold GLD Chart
Gold Stocks
Gold stocks have been struggling to move higher and last Friday gold made a
nice move higher while gold stocks sold down. My last article talked about
how trading gold (GLD) may be a better investment then gold stocks right
now simply because of the bearish broad market. The broad market looks like
it's about to make another leg lower and when the broad market sells off,
it pulls all stocks with it. The daily chart of the HUI Gold Bugs Index shows
precious metal stocks moving sideways while gold pushed higher. When gold
stocks start to underperform the price of gold I tighten my stops and mentally
prepare myself for gold to pull back. The smart money always seems to move
in and out of stocks faster than the commodity which is a topic I mentioned
in a previous report as well.
Gold Bugs Index Daily Chart
Crude Oil Analysis
Crude Oil has been under continuous selling pressure for the past 7 months
and this is the first buy signal I have had for it since it topped back in
July 2008. The weekly chart is very close to a buy signal. If you look at
the weekly chart of USO crude oil fund you will see that volume has shot
through the roof which generally indicates a turning point. Also the MACD
indicator is about to cross which will put this fund on a buy signal if things
go well all of next week. The support trend line is trending up slightly
and the down trend line is holding the price inside a small triangle. If
the price breaks out and all my indicators are putting the odds in favor
of a long trade, then we will be looking for a buy point on the weekly chart
in the next few weeks. The weekly trading signals are good for intermediate
and long term traders.
Crude Oil (USO) Weekly Trading Chart
Conclusion:
The broad markets continued to move lower last week as it remains in a long
term bear market. For those looking to take advantage of gold, silver and
oil movements I recommend sticking with the commodity funds as they can increase
in value while the broad market is selling off. The daily chart of the hui
gold bugs index shows this clearly as gold stocks in general are underperforming
the price of gold right now. There is an opportunity for oil to make a move
higher if things come together in the next couple of weeks but until then
we will be patient and let the trade come to us.
If you would like to receive my free weekly reports please visit my website: www.TheGoldAndOilGuy.com.
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Author: Chris Vermeulen
Chris Vermeulen
TheGoldAndOilGuy.com
Chris Vermeulen is Founder of the popular trading site TheGoldAndOilGuy.com. There he shares his highly successful, low-risk trading method. For 6 years Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets. Subscribers to his service depend on Chris' uniquely consistent investment opportunities that carry exceptionally low risk and high return. Reach Chris at: Chris@theGoildAndOilGuy.com
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
Copyright 2008-2013 © Chris Vermeulen
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