Tuesday, July 10, 2012
You Snooze, You Lose and Trading Gold Using TSI
Darn it if I didn't wake up today an hour after the NYSE began trading and miss out on having some serious fun. It's my birthday today and besides, I don't have to go to work in the summer so, well, I'm sure you understand what motivated me to snooze. But the old cliche still rings true and I'm going to show you the opportunity I unfortunately chose to lose.
The opportunity had to do with trading something gold related like Direxion's Gold Miner Bull/Bear 3X ETFs (NUGT /DUST). The True Strength Index (TSI) indicator was handing out the trades on a silver platter this early morning, requiring no new tricks but the use of the basic techniques we have talked about for the past two years.
However, I am going to show you something quite interesting about the TSI indicator that I have recently figured out. If you read on we'll be to that discussion before you know it.
So anyway, here is the 1 hour chart of gold futures (GC) and the first trade this morning was a SELL using the negative divergence technique. Gold screamed right past its previous price high of 1597.3 (I use this bar because it correlates to the TSI high shown directly below) and reached 1602. Well, that wasn't going to work. Additionally, the lowest indicator panel continues to show that money is coming out of gold, not into gold. So then gold drops and drops and drops.
Click on any chart to ENLARGE
Great trade and I slept right through it. But then, gold drops so far that it blasts right past its previous low of 1582.7 and reaches 1581.3. Good heavens. Now we have a positive divergence BUY signal.....time to cover the short position and go the other way. Oh yeah, I was still asleep.....or more likely just barely awake.
Anyway, on this chart and the one that follows I would like to show you that *quite interesting* something I promised to discuss if you kept reading.
You'll notice I am showing a pair of moving averages on price and configured their colors to identify their respective up/down direction movement.
And, you'll also notice that the location of the trend line break BUY/SELL signals torpedo price right about or just before these two moving average begin to change direction.
Here is another chart of gold (GC) but this time on the 4 hour time frame. I wanted you to see another example of the moving average behavior vs. TSI trend line break signals. Also note: the moving averages chosen are the same as my TSI setting (7 and 4).
It is clearer to see what I am talking about on this 4 hour chart (above) as price is not wiggling around as much as on the 1 hour chart.
This *quite interesting* discovery still does not explain the mystery of why the trend line break technique works as incredibly well as it does, but it does somewhat explain with clarity what is actually going on at or around the time of the signals.
I have asked some really smart mathematicians to explain to me why the trend line break works as well as it does. Unfortunately, they have no idea. Seriously.
But maybe you do. And if so, PLEASE tell me!