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Chart Focus–Mini Gold Down trend

Chart Focus–Mini Gold Down trend
April 26
03:14 2012

Here is a 15 minute chart snapshot of Mini Gold Futures (Symbol: YG) spanning Tuesday, March 12th, 2012 to Thursday, March 15th, 2012. This chart includes several technical indicators:

  • 8 period simple moving average (blue line)
  • 20 period simple moving average (red line)
  • 200 period simple moving average (green line)
  • Bollinger Bands (purple lines)
  • Relative Strength Index (RSI) (dotted line)
  • Volume (dark blue bars)

The Walkthrough

There are many ways to track the market. Some professional traders use support and resistance lines, while others prefer to use moving averages.

On this chart, we will look at a different way of tracking the market. This new way of tracking the market has three components or can be broken down into three waves.

The first wave is the initial move with a very small pullback. The pullback after the first wave should be relatively small never erasing more than 55% of the first initial move. This first step is important because if the market pulls back and erases more than 55% of the initial move than the market has produced no trend but instead a sideways movement. Pullbacks are healthy as they represent profit-taking and give opportunities for late investors or traders to get into the market.

After this small pullback the market should continue to produce candles in the direction of the initial move signifying the beginning of the second wave. The second wave is normally the biggest wave but can also produce the biggest pullback.

This is very important to understand because many traders using this method can counter-trend trade the pullback of the second wave. This is the safest wave to trade against the trend because the pullback will be so big. The pullback after the second wave is a short-term strategy of making money and none of the trades should be held over a long period of time as the market can suddenly reverse and continue back in the direction of the original trend.

After the second wave pullback the market will begin to produce a topping pattern. This topping pattern can include doji’s, a break above the top Bollinger Bands, or an inability to break major resistance.

The third wave is the last wave and will have very few pullbacks. After this third wave the market can trade sideways for a period of time as a form of reset. After this reset the market can continue in the direction of the previous three waves, go sideways, or begin a trend in the opposite direction of the previous three waves.

In order for each wave to be considered a wave it must make a lower low in a downtrend and must make higher highs in an uptrend.

The Lesson

These three waves give professional traders another simple way to understand how to properly trade the markets. This is one method for traders to learn how to follow the “rhythm” of a trending market. Needless to say, countertrend trading is not safe and should be done only after the trader understands this three wave pattern.

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