P1: PIC/PIC c07
August 12, 2008
Printer: Yet to come
HIGH PROBABILITY TRADING STRATEGIES FOR ANY MARKET AND ANY TIME FRAME
The 1BH as of August 17 is 132.33 and the swing low is at 120.41 for an almost 12point capital exposure. The proper position size based on the trade capital exposure and account size will risk no more than 3%. In these examples, I am not going to assume any particular account size. The maximum position size is an objective calculation you have learned to make and nothing additional will be learned by assuming any particular account size and going through the calculations for maximum position size for each trade example. The expectation is the XAU should eventually break up from the prolonged trading range and eventually make a new high well above the July 2007 high. We don’t need to make any fancy risk/reward calculations with this potential trade. If the XAU exceeds the July high, the potential reward will be well over three times the risk if the order is executed above the August 17 high. You engineers with paralysis of analysis can get your spreadsheets out. From my point of view, there is lots of upside potential compared to the minimal capital exposure and that’s all I need to know to consider the trade. I’m going to talk through the trade management and exit strategy and then list the plan. We’ve determined the XAU is in a good position to consider a long trade and the specific entry strategy. Before we enter the trade, we must identify the trade objectives and plan the trade management strategies. The first consideration is, what if we are dead wrong about a probable bull trend to a new high and the best we get is a minor corrective rally of the decline from the July high followed by a bear trend to a new low? Trade management (short-term unit): Trail the stop at the 1BL if the XAU either reaches the 61.8% retracement or following the second daily momentum bearish reversal. Why wait for two bearish reversals? Even if the XAU is only making a corrective rally, corrections usually have at least three sections (ABC) which will make two momentum bearish reversals, one at the Wave-A high and one at the Wave-C high. I used to trail the stop-loss on the short-term (ST) unit after the first smaller time frame momentum reversal against the weekly trend for a quick profit, but I found the market usually went higher (lower) to make a second momentum reversal even if I was wrong about a more extended trend developing. This is the basic short-term unit exit strategy for many trades. Why trail the stop at the 1BL if the 61.8% correction is reached even if the daily momentum has not made two bearish reversals? If the XAU is only making a corrective rally and not a new bull trend as anticipated, most corrections are complete by the 61.8% retracement so I want to be out of the first unit around there—but only by using a Tr-1BL, not exiting at the 61.8% retracement price itself. The objective of the long-term (LT) unit is to maintain the position with a relatively wide stop in the event the XAU makes a bull trend to a new high as anticipated. Trade management (LT unit): If the weekly momentum reaches the overbought zone, the bull trend should be in the final stages and the stop will be adjusted relatively close to the current market position. We’ll define the specific exit strategy for the LT unit if the bull trend progresses and the market provides more information to make a specific decision.