One common mistake traders make is getting too greedy with their trades.
And there is no better example than gold.
Traders often buy gold in hopes of catching exponential gains. But as we discussed just a couple of weeks ago, those outsized moves rarely play out.
Instead, gold has a habit of turning around and biting just as a big move looks like it’s getting underway.
That’s why I’ve found the best way to trade gold is to focus on capturing those reversals…
And an Opportunistic Trader trade from about a week ago on SPDR Gold Shares ETF (GLD) – an ETF that tracks the gold price – is a perfect example.
All up, that GLD trade generated a 49% gain in less than a week.
Let me show you how we did it…
Double Bullish Signals
The long-term 50-day moving average (MA, blue line) on the chart below shows GLD’s steady decline since its peak in early May.
But it wasn’t all one-way traffic down…
SPDR Gold Shares ETF (GLD)
Source: eSignal
In both July and August, there were counter-rallies against the prevailing downtrend.
These down legs were followed by a countermove up to a lower high. This kind of action is common in a downward pattern.
And the swings in the 10-day MA (red line) reflect this movement as well.
After the counter rally in August, the two MAs converged and briefly tracked closely together.
But GLD’s down move accelerated in mid-September. And the 10-day MA moved sharply below the 50-day MA.
As the chart shows, the strength of that down move put the relative strength index (RSI), a momentum indicator, well into oversold territory (lower gray dashed line).
That helped set up GLD for a potential bounce.
But we didn’t base our trade just on the chart showing positive signals.
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At the time, interest rates had pulled back for the first time since the Federal Reserve’s September meeting. That, combined with a rising yield curve, is typically a sweet spot for gold.
So on October 4, we entered a long GLD position by buying a call option. A call option should increase in value when the underlying shares rally.
And the position went our way just about right from the start…
Take another look:
SPDR Gold Shares ETF (GLD)
Source: eSignal
After trading slightly lower the following day (October 5), GLD started to rally and gapped higher soon after that.
Our position was in good profit. Then, on October 10, GLD opened slightly lower. That suggested that the rally could fade in the short term. So we decided to close out our trade by selling our call option.
All up, we generated a 48.9% gain in just six days.
That’s the same size move as the Nasdaq’s huge rally at the start of this year – which took over six months to play out.
To be fair, we generated this return in such a short period using options.
But this trade shows how capturing a quick reversal can generate strong gains.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. Trading Bitcoin can feel daunting – with all the hoops to jump through and risks like hacks. But with all the gains possible in crypto, you might also feel like you’re missing out…
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I’d love to see you there. All you have to do is RSVP here to save your spot.
Mailbag
One reader shared his appreciation for a recent trade…
Larry, just want to thank you… [I] banked 1977.90 in 3 days… probably should have stayed in trade longer but I’m retired and as long as I hit my weekly goal, I’m good… I also live just south of you… time to take the Contender out for some fishing. Thanks again… keep them coming.
– John A.
If you’re been profiting too, let us know at [email protected].