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August 1st, 2007 It's one thing to let your profits run on a trade, but it's also true that it doesn't make sense to take unjustified risks with profit that's on the table. So when I wrote recently to my trading signal clients that I had concerns with what I saw unfolding in the spot Gold (XAUUSD) market it was to protect the profit on the table. On our open long trade I increased the trailing stop to lock in gains of +1.3% for the remaining portion (the other half of this trade was closed for a +3.8% gain). Why am I nervous? If there's more market risk right now, what is the best way to manage it? Gold recently delivered a bearish reversal day: a big range day that opened near the high and closed near the low. Over the past year Gold has delivered another three of these reversal days. What happened in those instances? Well, it Was Not Nice! Further fast frantic declines within four trading days. Of course these reversal days don't always deliver further rapid declines, and if XAUUSD pushes above the high of the reversal day at 677, then that is a very bullish sign. Looking at an hourly chart, XAUUSD looks as though it should push to at least 669 before any decline unfolds (it's currently near 667), so I'm placing a "take profit" exit at 669 as a OCO (one-cancels-the-other) trade with the current stop of 656.81. Both exits will deliver profit, but it's the difference between +1.3% and +3.2% gains, which is worth having if available. One of those exits will get hit eventually. Then what should we do? * Spot Gold may soon head to one of two extremes. If it pushes past 677, it should go all the way to $750 or more. So I'm placing a conditional stop buy entry at 677.0. If this is entered the initial stop-loss is 656.81. * If spot Gold plummets from here (like it did in May 2006, after a reversal day), then I want to be short at 640.0 (sell-at-a-stop), with a stop-loss at 676.0. This would suggest spot Gold is entering its wave 3 decline (in Elliott wave terms) and should eventually continue down to under $540.0. * It's always dangerous to insist that the market "proves you right" and moves in the direction you anticipate. If you've read my recent article on the global spread of risk aversion, you'll know that I think Gold is heading north. But the beauty of this strategy is that I don't have to be right! Gold can leap up to over $750 or slump to under $540. I don't care - I can make further profits either way. View the complete article, including a chart of spot Gold, showing the reversal days, and a link to the piece on global risk aversion, at www.TrendSensor.com/MarketBrief/ DISCLOSURE: Murray Nickel holds a long position in spot Gold (XAUUSD), opened at $648.40.
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Murray Nickel is a mathematician, statistician, and professional trader. He offers a free trial of trading signals for global market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to build consistent success at trading global markets. Get your own completely unique content version of this article.
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