Tuesday, March 27, 2012


                                     Listen When Gold Speaks

Our old friend returns today for another visit. I am of course referring to the “Flying Wedge of Death” [FWD]. Below is the candlestick of today’s action in 15M.

If I had to isolate one kind of market action that almost guarantees losses among most traders, this is it in spades. The problem is threefold: 1) it’s nothing but a stop hunt at both extremes, 2) the reversals at the boundaries are very fast and messy, and 3) there is no follow through at either end.

In most cases, FWD occurs in relatively small range environments; and that makes it particularly dangerous because it is so easy to go from the high to the low and back again numerous times. The key is the breaking of the 50% retracement of the range. When that happens the market is set up for potential trouble.

One of the keys at the boundaries of the FWD that can give you a possible hint of trouble is what I call the “nibble, nibble, BOOM!” phenomena. An example will hopefully clarify better than a windy vegas explanation.

Let’s say we're near the high and spot gold is 1694.00 bid – 1694.30 offer in your order box. Let’s take a look at how the bid trades second by second:
Second 1:         1694.00 bid,    [nibble]
Second 2:         1694.17 bid,    [nibble]
Second 3:         1694.28 bid,    [nibble]
Second 4:         1694.39 bid,    [nibble]
Second 5:         1693.81 bid.    [BOOM!]

So, you’re sitting there long and in the flash of an eye blink you’re down 0.58 from maybe a place you wanted to sell; sorry, it’s too late. You had your chance, and now you will join others chasing the market down for your sell.

Which brings up an important point when you trade spot gold and not futures; most brokerage houses [or banks] will not allow limit orders unless outside a predetermined parameter. At Hotforex it is 10 pips, which is $1.00, but most houses are wider. So, why do they do this?

Easy. The dealer doesn’t want you competing with him for buy/sell prices at the current market.

“Hey YOU! Yea You retail trader; this is my gig and I’m not gonna allow you to mess up my pricing. I got stops to run and other orders to screw, and you aren’t gonna trim my margins. So, you can put that market order in and I will screw it royally I will take care of you.”

Except when you get “nibble, nibble, nibble, BOOMED!”

When you start seeing this happen near a high/low for the day, odds are very good the market isn’t going to be able to continue on its course. Gold is speaking to you; listen to what it is telling you.

Have a good day everyone.


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