Here's my idea to go short on gold (GC1!). This is a daily chart.
First, I always need 4 independent reasons to take a trade. They are as follows ...
1. Location
- Is the price in the correct location? In general, I price must be in the bottom of a range for a long, and at the top of a range for a short.
2. Market Structure
- Is there a double top with a breakout? I need to see a 'M' like structure in price.
3. Momentum
- Is there a divergence in MACD? This is one sign that a reversal in trend is around the corner.
4. Volume
- This is paramount. I need to see a bullish trend in volume if I am going long, and vice versa for short positions.
And when I am trading commodities, I need a 5th reason - the CoT (Commitment of Traders) report. In short, I need to see signs that institutions (large speculators) are going long when I am thinking long and going short when I am thinking short.
So, do we have our 5 reasons for GC1!?
We have ...
1. Location: We are above value in the Volume Profile. In other words, we are near the top of a range, right after the Cup and Handle target.
2. Market Structure: We see a double top with a breakout
3. Momentum: We have MACD divergence.
4. CoT Report: Downward stair action (M) in large speculators
5. Volume: Bearish
We've got 'em all. Now what?
Now, I only take trades where the minimum reward-to-risk ratio is 2:1. The 'M' gives us a nice framework for when to exit (stop loss) our trade. I am risking to the lower leg of the 'M'.
Here, we can even have a 3:1 reward/risk. Why? For our target profit, I just extend the R/R tool so 3:1 and see if that is a reasonable area to expect the price to go.
Is it reasonable, in this case?
3:1 profit takes us to:
- A cluster of support and resistance
- Middle of the Volume Profile
These are two areas are where price often settles too ... so we're good for our target :)
That's it. We have 5 reasons to short gold with a 3:1 reward/risk.
First, I always need 4 independent reasons to take a trade. They are as follows ...
1. Location
- Is the price in the correct location? In general, I price must be in the bottom of a range for a long, and at the top of a range for a short.
2. Market Structure
- Is there a double top with a breakout? I need to see a 'M' like structure in price.
3. Momentum
- Is there a divergence in MACD? This is one sign that a reversal in trend is around the corner.
4. Volume
- This is paramount. I need to see a bullish trend in volume if I am going long, and vice versa for short positions.
And when I am trading commodities, I need a 5th reason - the CoT (Commitment of Traders) report. In short, I need to see signs that institutions (large speculators) are going long when I am thinking long and going short when I am thinking short.
So, do we have our 5 reasons for GC1!?
We have ...
1. Location: We are above value in the Volume Profile. In other words, we are near the top of a range, right after the Cup and Handle target.
2. Market Structure: We see a double top with a breakout
3. Momentum: We have MACD divergence.
4. CoT Report: Downward stair action (M) in large speculators
5. Volume: Bearish
We've got 'em all. Now what?
Now, I only take trades where the minimum reward-to-risk ratio is 2:1. The 'M' gives us a nice framework for when to exit (stop loss) our trade. I am risking to the lower leg of the 'M'.
Here, we can even have a 3:1 reward/risk. Why? For our target profit, I just extend the R/R tool so 3:1 and see if that is a reasonable area to expect the price to go.
Is it reasonable, in this case?
3:1 profit takes us to:
- A cluster of support and resistance
- Middle of the Volume Profile
These are two areas are where price often settles too ... so we're good for our target :)
That's it. We have 5 reasons to short gold with a 3:1 reward/risk.