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Stocks & Risk Reward Ratio
by Chris Vermeulen
The past few months have been absolutely
crazy in the financial markets. Financial advisors and banks are taking a
beating from both the market condition and clients as individuals around the
world are losing 30+ of their investments. We have seen oil prices drop over
$110 per barrel from the high (73% decline), and the US dollar tumbled down to
71 and rebounded to 88 (23% gain) all in the mater of months.
Risk Management is what is needed if
we want to stay in the game over the long term. Follow strict risk/reward rules
is a must so that we donít not get caught chasing stocks and funds only to have
them turn around on us a few days later.
Focusing on keeping risk low for
potential trades is crucial for turning a profit over the long run. In short I
look for a basket of indicators including candle patterns and volume to be in
favor when buying or selling a stock or fund. When a fund generates a buy signal
I wait for a low risk entry point near my support or resistance level depending
if I am looking to go long or short. I need to see a perfect setup so that the
odds are favoring my side. Only then will I take a stab at the market. The
biggest issue with this is that I do miss a lot of good trades, but the key here
is that most of my trades are profitable and that is what makes it so powerful.
I would rather make 20 trades a year, than 150 trades and make the same profits.
This Weeks Analysis
Gold continued its push higher last week
getting a lot of investors and traders all excited. The daily chart does look
strong and it is currently on a buy signal. But buying at this level is much too
high of a risk. The price of gold is trading at the top of its 4 month trading
range which previously led to a 20% selloff in bullion. Our support trend line
is 10% away from the price of gold making it out of reach still. I trade
reversals when risk is only 3% from my stop/support price.
Daily Gold GLD Chart
Gold stocks have been struggling to move
higher and last Friday gold made a nice move higher while gold stocks sold down.
My last article talked about how trading gold (GLD) may be a better investment
then gold stocks right now simply because of the bearish broad market. The broad
market looks like itís about to make another leg lower and when the broad market
sells off, it pulls all stocks with it. The daily chart of the HUI Gold Bugs
Index shows precious metal stocks moving sideways while gold pushed higher. When
gold stocks start to underperform the price of gold I tighten my stops and
mentally prepare myself for gold to pull back. The smart money always seems to
move in and out of stocks faster than the commodity which is a topic I mentioned
in a previous report as well.
Gold Bugs Index Daily Chart
Crude Oil Analysis
Crude Oil has been under continuous
selling pressure for the past 7 months and this is the first buy signal I have
had for it since it topped back in July 2008. The weekly chart is very close to
a buy signal. If you look at the weekly chart of USO crude oil fund you will see
that volume has shot through the roof which generally indicates a turning point.
Also the MACD indicator is about to cross which will put this fund on a buy
signal if things go well all of next week. The support trend line is trending up
slightly and the down trend line is holding the price inside a small triangle.
If the price breaks out and all my indicators are putting the odds in favor of a
long trade, then we will be looking for a buy point on the weekly chart in the
next few weeks. The weekly trading signals are good for intermediate and long
Crude Oil (USO) Weekly Trading Chart
The broad markets continued to move lower
last week as it remains in a long term bear market. For those looking to take
advantage of gold, silver and oil movements I recommend sticking with the
commodity funds as they can increase in value while the broad market is selling
off. The daily chart of the hui gold bugs index shows this clearly as gold
stocks in general are underperforming the price of gold right now. There is an
opportunity for oil to make a move higher if things come together in the next
couple of weeks but until then we will be patient and let the trade come to us.
If you would like to receive my free
weekly reports please visit my website:
Vermeulen is Founder of the popular trading site
There he shares his highly successful, low-risk trading method. For 6 years
Chris has been a leader in teaching others to skillfully trade in gold, oil, and
silver in both bull and bear markets. Subscribers to his service depend on
Chris' uniquely consistent investment opportunities that carry exceptionally low
risk and high return. Reach Chris at: Chris [at] theGoldAndOilGuy [dot] com
This article is
intended solely for information purposes. The opinions are those of the author
only. Please conduct further research and consult your financial advisor before
making any investment/trading decision. No responsibility can be accepted for
losses that may result as a consequence of trading on the basis of this