By Scott Pluschau
Posted: 04 Jun 2012 05:10 AM PDT
The 30 minute chart is shaping up to a "Bull Flag" pattern. There is no confirmation of the pattern yet, which would be a breakout or liftoff from the top trendline in the flag on an increase in volume. Trading early in anticipation of breakouts is a mistake in my book. I would prefer to see liftoff from the flag during the Comex session. The target or "Measured Rule" of a bull flag is the length of the flag pole/mast added onto the breakout point which would be approximately 80 points which puts gold back in the $1,700 per ounce level and it would also put gold near resistance of the downward sloping trendline of the "Descending Triangle" on the daily chart.
The risk is the width of the flag or approximately 15-20 points at this time.
The textbook flag is one with significant volume in the mast, and diminishing volume in the flag, and then an increase in volume off the flag. It can take two or three attempts at a breakout before an "Igniter Move" happens.
The "flag" depicts over anxious short sellers with "weak hands", and accumulation from "strong hands". At times it is the other way around, which is why "Risk Management" is vital for survival when trading with leverage.
This current pattern would have increasing probabilities if we were in a different phase of development in the bigger picture. The daily chart structure is subject to randomness/noise from the larger and longer term time frame traders.
There are no guarantees with pricing patterns. I do not use patterns to predict, I use them to measure reward to risk and probabilities. Period.
With this multiple of reward to risk, a trader can be wrong 70% of the time, and be in business if using proper and consistent "Position Sizing" and "Money Management". This is why a trade plan that is entirely focused on "entry" signals is most likely doomed to failure. There are multiple parts to a trade plan, and they all have to be executed flawlessly.
All initial trade idea's are put on with the smallest position, so if I am wrong, I take my smallest loss. I would look to add onto a trade two or three more times depending on what or any new continuing or bullish patterns develop. It's a long way from 1630-1710 with potential for many trade ideas in the smaller degree time frames if the measured rule of the flag is ultimately reached. This is part of an effective "Trade Management" plan in my opinion, which for me avoids the psychological disaster of putting on an immediate large trade that would only attract "worry" and "doubt".
By adding to winning trades, I am embracing risk. I don't want to avoid risk when the market is validating my trade idea. A losing trade is risk I want to avoid. Adding to a losing trade is a formula for disaster. When the market is invalidating my trade idea, it is never risk to embrace.
(Click on chart to expand)
This post is a follow up on the breakout from the balance area post here:
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