Ok, so I don’t know what happened to yesterday’s brilliant comment. It was a sizzler as I recall.
Anywhooo, on to today. I mentioned that I had a stop-buy in gold and a stop-sell in the S&P 500.
Let’s start with what are those. I use stops all the time. I rarely place a trade while the market is open – the main market that is.
So, if I get a trigger, I will place a buy or sell by way of a stop. This a a price level at which I want something to happen.
The gold chart above is of the gold futures. As you can see the blue (21 EMA) is above the brown (55 EMA) which we will call an uptrend. Since we will only trade with the trend, per our process, we can only go long. Or benefit as something is going up in price. The price came below the red (8 EMA) and crossed back above giving us a buy signal. I placed a stop-buy just above resistance.
Since most of you can’t buy a futures contract, we will switch to the gold symbol.
The ETF for Gold is UGL (there are others). This is a double up symbol.
The trade details: Portfolio = $100,875
10% of the portfolio = $10,000
2% of the portfolio (our max risk) = $2,000
This means we can only buy 200 shares to stay close to our 10% position limit of $10,000. Our stop is at $52.30 and has been made a trailing stop. The buy-stop is at $57.10 just above the resistance level. The upper red arrow on the chart.
The protective stop is just under support at $52.30. This is the level that if crossed by the price tells us we are most probably wrong to have placed this trade at this time and we should get out.
Our risk therefore is $960 (200 shares x $4.80).
All within our process paremeters. Please note that in order to fulfill our boundaries, the trade size had to be reduced to 200 shares. I am more interested in an intelligent protective stop placement than I am getting a full risk position. The stop at $4.80 meant that I could have met my $2,000 risk constraint , but the share position would have been over $23,000, violating our position size rule.
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