A WINNING STRATEGY
Peter Degraaf
Successful traders make use of several different systems, for there is no single system that delivers the goods forever. This essay highlights a system that can be a very helpful tool in the arsenal of traders willing to do their homework.
Featured is the two year chart comparing the relative strength of silver versus gold. The chart is courtesy of www.stockcharts.com ($SILVER:$GOLD). In this essay the focus is on turning points in the price of silver.
In order to provide a clear picture of the turning points, I have selected the line format (based on the closing price), instead of the high/low price bars.
Generally speaking, in a bull market, silver moves UP faster than gold. In a bear market, or during a correction, silver tends to move DOWN faster than gold.
This ratio chart is a useful tool in the trader's arsenal. After you study this chart, why not print it out, and compare it to the ups and downs of your favorite silver or gold stock, or to the movement of bullion.
For the purpose of this analysis, we will call the area between 16 and 17 the 'neutral zone'. Our interest lies in the turning points BELOW 16, and ABOVE 17.
Commencing with June 2004, there are TEN of these. The turning point (TP), which occurred during the fall of 2004, would have required a filter, consisting of a supplemental trading system, to get rid of the confusion. In this essay we will use the final high point of this two month congestion period, marked .0177 .
At TP #1, marked on the chart with .0146 in a small box, the price of silver during week #1
of June 2004, traded at 6.00 and, in retrospect, issued a buy signal as it turned up.
At TP #2, marked .0171, during week 1 of Aug 2004, silver traded at 6.85 (+.85).
At TP #3, marked .0153, during week 2 of Sep 2004, silver traded at 6.10 (-.75).
At TP #4, marked .0177, during week 1 of Dec 2004, silver traded at 8.00 (+1.90).
At TP #5, marked .0150, during week 1 of Jan 2005, silver traded at 6.50 (-1.50).
At TP #6, marked .0173, during week 3 of Feb 2005, silver traded at 7.35 (+.85).
At TP #7, marked .0159, during week 1 of May 2005, silver traded at 7.00 (-.35).
At TP #8, marked .0180, during week 1 of June 2005, silver traded at 7.50 (+.50).
At TP #9, marked .0154, during week 4 of Aug 2005, silver traded at 6.75 (-1.15).
At TP #10, marked .0171, during week 2 of Dec 2005, silver traded at 8.73 (+1.98).
IN THEORY, this system produced 10 perfect trades. In practice, due to human emotions, and human interpretation, there is no such thing as a 'perfect system'. However, when used alongside other tools, this is a very useful trading system.
The question now arises, what action do we take this week? What direction do we take from this ratio chart? The system told us to take profits during TP #10, (at .0171), with silver at 8.73 . The day following the signal, silver opened at 8.70 . Thus the opportunity to take profits did present itself. Having thus taken some profits, we look for a point to re-enter. We can wait for the ratio to drop below 16 again, and enter at the next TP, but what if the ratio finds support at the 200 day moving average (DMA), and rises ABOVE the latest TP?
This is why we need more than one tool in our arsenal. The most important tool at our disposal is the daily bar chart. This chart shows very solid support at 8.00 to 8.20 (the area of a massive break out a few weeks ago). Just as a ceiling is resistance for people who live below, so a floor is support for people who live above.
In the event of a drop in the price of silver, close to this area of support, it may very well turn out to be an excellent buying opportunity.
Meanwhile, turning our attention once more to the ratio chart, by printing out a copy, and drawing a support line that connects the lows of Sep 2005, with the lows of this past week, we can begin to nibble at silver and silver stocks, as long as that support line is not violated, and remains intact. An ideal place for a protective sell stop will be if this ratio closes below the combined 50 DMA and 200 DMA, (both at 16.5 just now). In that event, it is very likely that the ratio would be on its way to create another TP, below 16.
Monday December 19, 2005
DISCLAIMER:
Please do your own diligence, I am not responsible for your trading decisions.
Peter Degraaf is a successful on-line stock trader who has been active in precious metals since 1962. He publishes a weekly email alert for his subscribers. For a free 60 day trial, please contact him at itiswell@cogeco.ca
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