Jan

The Gold Trade That You Never Got to See – 2X Long Gold ETF DGP

I stumbled across a gold trade we set up in our testing system way back in early December, before the Trade Planner was introduced in the Research Lab. I hadn’t looked at this trade in gold since last year and was startled at the current view, still active in our testing environment. Take a look at this:

"Go Long DGP on White Candle at 15.50"

An interesting note is that our system was originally designed to only fill a trade on a White Candle, hence the text that looks different than the production version. Unfortunately the White Candle logic created issues with the software and we decided to have it consider a trade "filled" if it traded at the exact entry price regardless of the color of the candle. This actually made more sense since the idea is that we could place a "buy stop limit order" at the entry price and not have to worry about pulling it if the candle was red. It’s actually a double-edged sword as we most definitely prefer to take entries on White Candles (the current stock price is higher than the open), but in certain cases a stock would open above the Entry price, then pull back, fill the entry and go right on up. So the point is while we would prefer each trade fills with a white candle, we built the system to track each trade based on if the Entry price was hit. It works much better for real life trades that way.

But the most interesting thing about the chart above is what the Trade Plan looked like originally. Since the system only tracks the most recent 20-trading days here is a chart of DGP when the original plan was created in the test bed back in December.

Normally we would not set the entry on a gap like this but I remember some unusual circumstance we wanted to test so the bar was set really high. The problem with the leveraged Gold ETF’s is that they tend to gap all over the place as gold itself is very volatile on a day to day basis and the leveraged ETF’s magnify this even further. By the way the opposite of DGP is DZZ, the symbol for 2X Short Gold but I wouldn’t fool with that one as it’s financial suicide to bet against gold except for only the most nimble trader on a very short term trade.

Did you know that gold finished 2007 up about 5% marking the 8th consecutive year with a gain? Gotta love gold, the only real money, the global currency and equalizer of all fiat currencies…that’s a story for another time though. Interestingly enough the price of an ounce of gold and the price of a unit of the S&P 500 were both right at 840 on January 21st. I mentioned to a friend that it was a great benchmark price to start a "horse race" between the SPY and GLD. It’s easy to get perspective when you start with 840 on gold and 840 on the S&P. Those that don’t follow these things as closely as we do might find it easier to monitor. Our straw poll seems to favor gold beating the S&P in 2009 but that wouldn’t be anything new.

Here’s a fascinating snapshot of returns for various asset classes over the last decade.

As far as the market goes, yes it’s still a BEAR market and tough to trade but we manage to persevere. The final stats for the January Research Lab trades won’t be in until the current Open Positions are closed. The Closed Positions go into the stats for the month in which they were started so we will have to wait for the final tally. If the selling strategy is "sell all at Target1" we are doing quite well. Actually I might be on to something there. Would it make sense to take profits quicker in a bad market? We know a higher percentage of the trades will hit T1 than T3 so we might consider adapting our selling rule to change with the times. I want to mention that new Trade Plans are generally staged on the Waiting page in the morning before the market open rather than the night before. This is so we can run a final filter to eliminate any trades that might be gapping drastically from the previous session. This is especially relevant during earnings season and in such a choppy market.

Someday when things smooth out we can go back to loading the plans in the night before and we can sleep later in the morning. Remember the good old days when stock traded in fractions and would open 1/8 or 1/4 from the previous close instead of the crazy gaps we see these days?

So that’s it for now and I hope everyone has a great weekend. February starts next week and that means spring is right around the corner.

By the way, if you are interested in TRADING GOLD and OIL, I came across a great website that specializes strictly in that endeavor. Chris Vermeulen is the "Gold and Oil Guy" and produces some great content on his Blog. If you are interested in trading Gold and Oil via ETF’s and getting timing signals and technical analysis be sure to get his complimentary weekly reports. Chris actually trades both the DGP and DZZ and his strict focus on the gold and oil markets tends to make him an expert as far as I’m concerned.