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-- Posted Wednesday, 14 May 2008 | Digg This Article | Source: GoldSeek.com

By: George Cocalis

As gold tries to gain traction and reverse its course on the upside, traders are starting to re-enter the market cautiously. After strategically placing stops on the downside and getting stopped out, the question is: where do you get back into the market? Traders are always tempted to pick the bottom of the market (or as we say in the industry, “bottom fishing”) but that approach usually leads to failure in the long term. One might get lucky once in a while and actually catch the bottom, but the probability is very low that one can catch the bottom number in a consistent fashion. In order to talk about where to get back into the market, we have to talk briefly about where one was stopped out.

Chart courtesy of QST

The placement of stops should have two purposes: the first is obviously to get you out of the market to try to limit your losses and preserve capital, and secondly, to put you back into the market when you want to get back in. Stops should be placed where the market should technically hold and bounce from that level. This level should not be broken by any means, but if the market penetrates and closes under this level then you know that the market has changed technically and that swing and short term traders should be out of the market. Ideally the market should target the next major support level on the downside and bounce from that number, but that is not the buy at which to re-enter the market. The buy at which to re-enter is the closing price of the first level that was broken on the downside. I suggest placing buy stops above the market to enter positions at important resistance levels. By adhering to this rule you have a better chance of getting back into the market on the upside without trying to time the market and possibly missing a portion of the next upside move, for instance, such as an overnight move. The key to this strategy is to have solid support and resistance numbers. More to come…

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DISCLAIMER: Futures and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. In no event should the content of this correspondence be construed as an express or implied promise, guarantee or implication by or from Brewer Futures Group, LLC, Brewer Investment Group, LLC, or their subsidiaries and affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of options and/or futures positions such as “spread” or “straddle” trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

-- Posted Wednesday, 14 May 2008 | Digg This Article | Source: GoldSeek.com

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