We've Got a Winning Hand in Gold, Now It's Just a Matter of Managing It
Here's our updated battle plan after 'Iron Mike dropped the hammer.'
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Back on March 22, with spot gold trading near $2,170 (green), we laid out our battle plan for a trade.
On that day, a sharp pullback from the $2,222 area (point 1) pushed gold all the way down to $2,165 (point 2), causing our entry at $2,170 to be hit.
The trade was based on an old-school A-B-C-D pattern. This pattern includes a strong bull move (A-B), followed by a weak response by the bears (B-C).
At this point, the cards were on the table. In A-B, the bulls were punching like Mike Tyson in his prime. In B-C, the bears could barely land a glove.
It was only a matter of time before Iron Mike dropped the hammer.
That happened on Thursday, when gold jumped by over 1%, hitting an intraday price of $2,225.5. This caused our preliminary target of $2,225 (blue) to be hit. Our ultimate target remains $2,325 (blue), which is approximately point D of the A-B-C-D pattern.
My mentor convinced me to focus on improving my worst-case scenario on each trade. Take care of the worst-case scenario, and the best-case scenario will take care of itself.
How can we improve our worst-case scenario on the gold trade? We’ve already hit one target, closing half the position for a profit of $55 per ounce ($2,225 exit - $2,170 entry). This cuts our risk in half.
Now, take a look at the green area in the center of the chart. On Thursday, gold broke out of that zone, which represents a consolidation that lasted for about three weeks.
Now that gold has broken out, it should stay above that area of consolidation. If gold falls back into that consolidation, then the breakout has failed. If the breakout fails, we’ll exit the trade.
We’re raising the stop to $2,175. If the price falls to that point, the breakout has failed and we’ll exit the remaining portion of the trade with a profit of $5 per ounce ($2,175 exit - $2,170 entry).
Here’s the updated chart, including the new stop. Note that target 1, at $2,225, has already been hit.
Our worst-case scenario now consists of a $55 per ounce profit on half, and a $5 per ounce profit on the other half. Not bad.
The best-case scenario would be a profit of $155 per ounce on half ($2,325 - $2,170), and the already-filled $55 on half. I’m not worried about best-case scenarios, since there is nothing I can do that will cause the price to move higher.
However, I can continue to strategically trail the stop on the remaining half of the trade. Every time I do this, I’ll be improving my worst-case scenario.
At the time of publication, Ponsi was long gold.
