One fact is ever true about the financial markets:
What goes up
will come down.
This is a tough fact to keep in mind when a stock, commodity, or other trading instrument is in a speculative run upward as GOLD is right now.
The angle of ascent tells traders how fast speculation is accelerating to an unsustainable vertical rise. The closer a trading instrument, whether it is a stock, option, index, e-mini, currency or whatever, the close that instrument moves to a vertical 90 degree angle the more unsustainable the trend.
Chart 1
We have this situation building right now in GOLD. Anyone who has been around the markets for many years; anyone who is successful is not buying gold right now. The wise money investors and the savvy traders of the market got into stock quite a while ago and are enjoying the ride up. But they all know that this run will not last.
It is simply too steep and too fast. The laws of physics play into the market at times and trend angle of ascent or descent is something every serious trader needs to learn to recognize.
Getting into a fast moving stock, commodity, or derivative can be a challenge. Getting out profitably can be impossible.
That is because the professionals of the market, the High Frequency Trading firms, and the Quant formula traders have a closer connection to the market, faster computers, and trigger orders.
To get a clearer picture of how gold has gone ballistic, a line chart on a monthly scale can be used.
Chart 2We can see that the angle of ascent has shifted and is much steeper in the past few months. Although these patterns can take weeks, or many months to reach the final peak high, you as a retail trader need to start planning your exit strategy now.
Why? Because getting into a speculative run is relatively easy compared to getting out with profits.
These runs up are deceptive and are the primary reason so many small investors and retail traders lose money in the stock market. It is not that smaller investors or retail traders can’t figure out what to do but that they don’t fully comprehend what a collapsing market can do.
Right now the stock market is falling, and Gold is being bought up as a “safe-haven” but there is nothing safe about gold right now. In fact, stocks are the safer place because the value of stocks is under the true value of the company for many stocks.
Unfortunately most investors and traders listen to the news and react in panic, buying when they should be selling and selling when they should be buying.
We will return to this chart once the momentum of speculation ends and Gold begins to collapse.
Here is a chart of Oil from 2007 when everyone was betting it would continue to climb another hundred points or more. The downside is far more severe than the upside. Often price runs so fast that stop losses are jumped over or prices gap down.
Chart 3Therefore, if you are holding gold in any type of trading instrument, it would be wise to watch the angle of ascent and plan how and when and where you will exit.
Don’t make the mistake many novice traders make, thinking they can exit right at or near the highest price of the peak. Most traders will find that their orders get executed way down below the first level of support on a collapsing speculative run.
Remember you are trading with and against the HFT trading firm, professional traders who are right on the floor and have their orders executed within milliseconds. Your orders must travel through the internet, to your broker, then onto the market, IF your broker sends your order to the market. Yes all orders must be executed within a few minutes.
However, the market is not trading minute by minute, it is trading at the millisecond level. That’s 1/1000 of a second. Even one minute to get your order executed means millions of orders moving in and out ahead of your order.
Retail traders do not have access to millisecond trading; to compensate for this order flow variable, exiting before a collapse commences is crucial.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
©2011 Decisions Unlimited, Inc.
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