Are you using the right charts that match your style of trading and tracking gold and silver?

Let me re-phrase my question with a “road trip” analogy.

If you were traveling cross-country, say from Chicago to Los Angeles, your most important roadmap would highlight only the interstate highway system. Until you arrived at your exit ramp, you would have no need for map which illustrated county highways throughout the Midwest and Plains states and certainly no use for one which showed you every surface street between Illinois and California.

Yet if you were going to dinner at a restaurant 20 miles from where you live, I doubt if the interstate highway system maps would do you much good. In fact, I know it wouldn’t. No, you’d want a detailed street map which preferably highlighted construction delays and one way- streets too.

 I like the travel / trading analogy because I think it translates well for traders and trading. Are you trading gold with a six-month time horizon or are you day-trading the smallest hiccups and blips in the silver market? Let me use the events of last August 25, 2011, to illustrate.

Note: Trading futures and options is speculative in nature and involves substantial risk of loss.

The previous day (August 24, 2011) was a generally bearish day for gold. Profit-taking may have been a contributing factor, along with the announcement that evening, that CME Group was going to raise speculative margin requirements for gold futures by 27%. This increase would be retroactive for anyone holding a long or a short futures position. In early morning trading on Thursday (Aug. 25) the precious metal market opened lower but then recovered. Let’s look at four different charts and how the wrong chart could have caused a faulty analysis of the market events at hand.

SOURCE: http://www.Markethead.com Quote data provided and hosted by Barchart Market Data Solutions.

If you characterized yourself as a long term position trader, someone who focused on the unprecedented bull market of the past six years, using monthly continuation charts (see above), the minor reversals of the prior week were not even observant. To your analysis, the bull market appeared to continue unabated.

But swing traders, those whose positions and analysis typically have a 3-10 day focus, the weekly and daily charts would have shown a slightly different picture.

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SOURCE: http://www.Markethead.com Quote data provided and hosted by Barchart Market Data Solutions.

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SOURCE: http://www.Markethead.com Quote data provided and hosted by Barchart Market Data Solutions.

The appearance from the chart is that August 23, 24 and 25 were down-days, followed by a return of bullishness on the 26th.

Now, let’s drill down a bit further and imagine we were day-traders or scalpers. That is, traders whose time focus and analysis is measured in minutes and hours or perhaps even minutes and seconds. The “interstate highway” map of monthly and weekly bar charts would provide very little information or guidance. These very short term traders would focus on 30 minute bar charts or perhaps even five minute bar charts. Let’s first look at a 15 minute bar chart, covering August 24 -26. Each vertical bar represents the hi-low of a fifteen minute period. [remember, COMEX gold futures trading is open almost 24 hours a day].

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SOURCE: Markethead.com; Quote data provided and hosted by Barchart Market Data Solutions.

Anyone following gold futures through intra-day charts, such as fifteen minute bar chart, should be aware that level of trading in COMEX gold futures tends to be highest between 8:00 am – 2:00 pm EST and to a lesser extent, between 3:00 am-4:00am, as the European market opens and trading gets underway.

Trading futures and options is speculative in nature and involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. All known news and events have already been factored into the price of the underlying commodities discussed.