Gold and silver broke out of consolidation area to signal a short- to medium-term bull run and a new trading range. This range is wide enough for traders and investors to make decent profits.
In the case of gold, the profit range is about $100, and, in case of silver, the range is about $7. Conservative traders buy at the bottom of the range and sell or short at the top of it. Aggressive traders enter into positions in the middle, too. For both metals, the bottom range is very wide and the top zones narrow. Wide ranges create higher risks, as the distance between the entry point and the stop-loss exit is high. This means, in the event of a stop out, the losses will be pretty high.
However, there are ways to minimise the risk of losses by entering into positions when prices are deep inside the range, with a tight stop outside it. Let us look at the ranges of gold and silver, and also try to narrow the loss of risk on the wider areas. For gold, the range to buy is between $1,609 and $1,680 per troy ounce. We are looking at the mini-sized gold futures continuous contract. The buy range on a similar contract in silver is between $29.60 and $32.65. The range to sell gold is between $1,780 and $1,815, and on silver it's between $39.70 and $41.10.
The sell range is not too wide, and one could enter a short position at the lower end, with a stop above the top end. If one wanted to lower the risk, the entry level on silver would be $40.25 and that on gold would be $1,797. Remember, narrowing the range increases the possibility that prices would never reach the entry level before turning around.
Since the range to buy the precious metals is too wide, there are a few things one could do. First, one could scale into the position. So, for instance, if you plan to buy three contracts, one can be bought at the top of the range, one in the middle and one at the bottom. The other option is to let prices drop into the range and then buy as these move out of it. The option we prefer is to buy at the bottom, where the entry for gold would be $1,635, with a stop loss slightly below the range.
Fundamentally speaking, the rally in the precious metals is due to the risk off scenario gripping the market, with the uncertainty in the euro zone countries. The risk-off theory makes sense, as both the dollar and the precious metals are rallying. These two usually move in opposite directions when the risk in the economy is not high.
Finally, it's important to keep an eye on the breach of the buy and sell zones. In case prices close above the sell zones, one should give up on the bear theory, as prices may be headed higher. Also, if prices close below the buy zones, one should give up the bull theory. Range-trading is a great technique to add to your market approach, as markets tend to move in ranges a lot. It is also easy to pick tops and bottoms in a range-bound market.
The author is based in Chicago and is the editor of www.capturetrends.com
