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Trading Gold - An End of Day System

  • Post #1
  • Quote
  • First Post: Jun 26, 2011 9:26am Jun 26, 2011 9:26am
As everyone knows, there seems to be a very good correlation between gold and various currencies. Of course, gold doesn't behave exactly like currencies as gold is driven mainly by speculators while currencies are driven by central banks and government policy and the likes, but if you're trading on a long enough timeframe the correlation can be useful.

Here is a long-term end of day system I have made for Trading Gold

You need to keep track of the following: The number of days since the price closed higher than it has ever closed in the previous 120 days, the number of days since the price closed lower than it has ever closed in the previous 120 days, the highest closing price in the previous 10 days, and the lowest closing price in the previous 10 days.

We are aiming to buy on a dip during a strong uptrend; or sell (go short) on a peak during a strong downtrend. This is generally the best way to trade commodities. It is not (in my opinion) the best way to trade currencies, when a currency is making new highs or lows it is, in my experience, best to just go long or short there and then without waiting for a retracement as there is more chance of the price continuing to move in that direction than there is of a retracement. But currencies behave differently to commodities as speculators have far more influence in the commodities markets than they do in the currencies market.

The rules are –

 

  1. If the price of gold closes at a new 10 day closing price low AND it made a new 120 day closing price high more recently than it made a new 120 day closing price low AND this 120 day closing price high happened in the previous 60 days – then we have a dip in a strong uptrend. Go long with a 40 day time-based exit.

 

  1. If the price of gold closes at a new 10 day closing price high AND it made a new 120 day closing price low more recently than it made a new 120 day closing price high AND this 120 day closing price low happened in the previous 60 days – then we have a peak in a strong downtrend. Go short with a 40 day time-based exit.


The results from the beginning of the year 2000 to the end of May 2011 are –

179 winning trades
87 losing trades
6206.40 gold points won
1899.55 gold points lost
Money won to money lost ratio (before the costs of trading) is 3.267 to 1

  • Post #2
  • Quote
  • Edited at 10:01am Jun 26, 2011 9:40am | Edited at 10:01am
Quoting Davidee
The results from the beginning of the year 2000 to the end of May 2011 are –

179 winning trades
87 losing trades
6206.40 gold points won
1899.55 gold points lost
Money won to money lost ratio (before the costs of trading) is 3.267 to 1
Hi Davidee,

Have you forward tested this system yet?

Also... what are your stop loss rules? or when do you close a losing position?

Thanks!

-f4e
I saw it here on babypips this guy had a nice gold system. http://forums.babypips.com/forextown...ng-xauusd.html
Thanks, results look nice Although i have to make a comment on this one:

On average you lose 1900/87 = 22 points per loser. Let's say you risk 2% of your equity on each trade. So in those 11 years you make 6200/22 = 282 times whatever you risk. In 1 year this is approx. 25 times. So per year, you would be making 50%.

Might be great for people with a lot of money, but for the average forex player who might want to go for the quick profit this might be a bit to small. Thereby, market conditions keep changing. and this strat might not be working anymore in the furture.

Just a thought however, thanks for pointing out the strategy
Free4ever-sk, I don’t use hard stops and would just advise waiting for 40 days even if the trade goes against you. The trick is not to use to much leverage, I aim to keep my leverage below 3:1 but sometimes admittedly it goes go higher, especially if the trade is in profit and I want to add another position. I think stop losses/breaking the time-based exit rule are only to be used in extreme circumstances like when Lehman’s blew up in 2008 or the crash on 1987 etc... Stops aren’t the norm for me.

As esquire pointed out, if you’re not using leverage you might “only” make 50% per year. Personally, I’d be delighted with that; my own target is 30% per year! Yes, that means if I don’t have a lot of money I won’t make a lot of money, but that’s OK with me. Better than the alternative of using to much leverage and blowing my account – which I did several times when I first started trading by trying to use 50:1 leverage with 20 pip stop-losses.

I personally don’t believe anyone can turn $1,000 into $10,000 in a year without being over leveraged and having way to much risk. When you’re trading with 20 pips stop losses and the like the spread is actually a large percentage of the profit you stand to make/lose. Plus 20 pips moves can almost happen at random. I advise taking a step back, looking at the daily charts and taking long-term positions with low leverage. 5 minute charts, 50:1 leverage and 20 pip stops is a sure way to the poor house IMHO. Well prehaps others can succeed trading that way, but I can't.
Quoting Davidee
Free4ever-sk, I don’t use hard stops and would just advise waiting for 40 days even if the trade goes against you. The trick is not to use to much leverage, I aim to keep my leverage below 3:1 but sometimes admittedly it goes go higher, especially if the trade is in profit and I want to add another position. I think stop losses/breaking the time-based exit rule are only to be used in extreme circumstances like when Lehman’s blew up in 2008 or the crash on 1987 etc... Stops aren’t the norm for me.

As esquire pointed out, if you’re not using...
Hey thanks for the info mate!

Very wise advice!

Cool system by the way.

Cheers,

-f4e
According to this strategy we should have gone long at the close of last Friday's bar or as market opens today; is that right?
Regards
Quoting howard
According to this strategy we should have gone long at the close of last Friday's bar or as market opens today; is that right?
Yes, that's right.

Gold made a high of 1556.70 in early May, so the trend is up. And on Friday it closed at a new 10 day closing price low of 1500.50. So, according to the system, 1500.50 is a good buying opportunity if you can get that price or better.

However, note that this is a long-term system, you have to be prepared to hold the position for about two months AND you should not use leverage.
Gold today is 1541.60, up 41.10 points since the buy signal. Lets see where it is in 40 days of the buy signal though...
Gold is up again, made a new high at around $1600 I believe.

Well done to all those who bought gold less than a month ago at around $1500, but there is another month or so left to go until that position can be closed according to the system.

The logic behind the system is the market has a long-term directional bias (a trend) but as gold is a commodity driven by speculation there will be dips and peaks. Currencies like the EUR/USD aren't effected by speculators gambling to the same extend that commodities are so they have less peaks and dips and it's best to enter on breakout, but not so with gold, best to wait for a pull back with commodities.


The system is simple -
Buy a dip during an up trend and give it time to work.
Sell a peak during a down tread and give it time to work.

Not guaranteed to work by any means but the odds of success with a strategy like this are usually in the traders favour.
Quoting Davidee
The system is simple -
Buy a dip during an up trend and give it time to work.
Sell a peak during a down tread and give it time to work.
I am going to try, thanks for the idea.
Quoting provance
I am going to try, thanks for the idea.
So did you get into gold at a good price then? If so well done

I think we might see QE2 in the UK soon...
Well, gold is now around $1700 an oz and the system will stay long as it demands trades of at least 40 days (8 weeks).

I have to say it though; I think the gold bubble is massive. When confidence finally returns to the market the bubble is going to burst and the price will drop like a lead balloon. Gold has very little intrinsic value, at least at $1700 per oz it doesn't. You can't get dividends on gold like you can with stocks, you can't even get interest like you can with currencies. But currencies have low interest rates right now, but they won't forever, or maybe they will.

From a fundamental point of view, my own take on this is that the banking crisis has been replaced by a sovereign debt crisis as banking debts were transferred to the state as the economy shrunk. But there is no backstop for sovereign debt and the buck stops here; once this problem is resolved that is the end of it.

How the sovereign debt crisis can be resolved I don't know. Perhaps the money will be printed? This will of course will devalue the Euro, GBP, Dollar etc relative to the developing world’s currencies but it might get us out of the woods. Anyway, when this is over, gold is going to tank.
IMHO gold is not in a bubble, it has had a constant rate of growth over many years - that is not the definition of a bubble. I agree it is overstretched on most technicals and may be due a retracement.

However the fundamentals lead me to expect higher prices long term, namely:

1 Inflation fears
2 Booming money supply
3 Market fears and instability

beeb
Well you might be right and I might be wrong.

You can’t eat gold. Mind you, you can’t eat money and you can’t eat stocks and shares either. But at least shares and money produces an interest/dividend. Way I see it, if gold doesn’t have the intrinsic value to justify its current price then it’s a bubble. IMHO it is bubble; until someone can convince me that intrinsic value justifies its price I will believe gold is a bubble. Bubbles can form over many years and last even longer, look a property/housing. But even housing is more valuable than gold.
  • Post #16
  • Quote
  • Edited at 6:42pm Aug 8, 2011 5:28pm | Edited at 6:42pm
Quoting Davidee
Well you might be right and I might be wrong.

You can’t eat gold. Mind you, you can’t eat money and you can’t eat stocks and shares either. But at least shares and money produces an interest/dividend. Way I see it, if gold doesn’t have the intrinsic value to justify its current price then it’s a bubble. IMHO it is bubble; until someone can convince me that intrinsic value justifies its price I will believe gold is a bubble. Bubbles can form over many years and last even longer, look a property/housing. But even housing is more valuable than...
Compare the price of gold against the "interest/dividend" over the last decade.....Gold wins.

Gold is a means of exchange, housing is not...

A bubble is a very specific and overused term - chart eg the techs against gold to understand what I mean.

Remember that you may be right and the market may be wrong, but the market can stay "wrong" longer than you can stay solvent. I say that not to score points but to underline that it is price action that determines whether we make money, not being right or wrong....



beeb

edit http://www.telegraph.co.uk/finance/m...-for-gold.html
Quoting beeb
Compare the price of gold against the "interest/dividend" over the last decade.....Gold wins.

Gold is a means of exchange, housing is not...

A bubble is a very specific and overused term - chart eg the techs against gold to understand what I mean.

Remember that you may be right and the market may be wrong, but the market can stay "wrong" longer than you can stay solvent. I say that not to score points but to underline that it is price action that determines whether we make money, not being right or wrong....



beeb

edit http://www.telegraph.co.uk/finance/m...-for-gold.html...
Yeah the market can certainly stay irrational for a long-time. I'm long because the system says go long on a dip when the market is bullish, give the trade time to work, then exit on a short-term peak. But as far as fundamentals go, the way I see it, gold is just a 'bubble' caused by fear of inflation, instability etc... When those things are gone (and it may take a very, very long time for those things to go) gold will have nothing to justify it's high price and the price will go pop. IMHO.
Quoting Davidee
Yeah the market can certainly stay irrational for a long-time. I'm long because the system says go long on a dip when the market is bullish, give the trade time to work, then exit on a short-term peak. But as far as fundamentals go, the way I see it, gold is just a 'bubble' caused by fear of inflation, instability etc... When those things are gone (and it may take a very, very long time for those things to go) gold will have nothing to justify it's high price and the price will go pop. IMHO.

Once again it is not a "bubble" by any proper definition. If you choose to call it one, that's up to you.

If you saw an equity rise by 20% a year for a decade, you would probably want to own it because it showed sustained regular growth......

When the fear of inflation etc are gone, gold will have been very much higher. I will sell my core holdings then, and in the interim I will trade on what I see in the charts and not on the basis of some emotive words....



beeb
Gold is hitting $1800 now, up 20% or so since the long signal.
Just curious, is that possible that the non stable situation in the Middle East will cause the bubble explosion?
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