Gold prices, oil and commodities remain bright spots in a volatile market, with fears of slowing growth and stubborn inflation exacting a toll on stocks. But investors seeking the perceived relative safety of commodities should set up stops before rushing in.
Tom Basso, Enjoytheride.world founder and author, tells Investor Business Daily's "Investing with IBD" podcast that he uses different charting strategies depending on the type of market he's considering.
For tracking commodities like gold prices and oil prices, Basso uses Keltner Bands that determine an asset's typical trading range. The Keltner Bands Basso uses indicate moving averages over a 21-day period. The indicator determines if an asset should be bought or sold based on whether the price bars hit the upper or lower bands, respectively.
Keltner Bands, like Bollinger Bands and other measurements of price volatility, manifest on the chart as lines that sit above and below the price bars.
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In March, gold futures smashed into Basso's upper Keltner Band, indicating what he interpreted as a buy signal for gold prices.
Gold Prices Won't Shine Forever
Gold prices have continued their run. Basso says the safe-haven asset is showing signs of coming down. He suggests being careful to monitor potential sell signals and holding to those rules.
"When you get a market like gold where it's very very overbought, you know sooner or later it's going to come back," said Basso. "I prefer to have a smoother equity curve. I want to have a higher return-to-risk ratio. I don't like large drawdowns."
Basso says he would continue to move up his exit price and be prepared to execute on that stop to lock in a profit when gold prices cross his sell signal.
Finding Entries And Exits In Crude Oil
The same techniques also can be used to spot opportunities in other commodities like crude oil. Basso says crude oil crossed the upper Keltner Band in late January, snapping nearly three months of crude oil's price chart moving near or below the lower sell band.
Being able to get out of a position on time is the other half of the battle for profits. Basso says it's important to set a sell level on an asset before buying into it. In the case of crude oil, Basso says that limit is set alongside the buy, near crude oil's six-month low.
Sticking To Your Sell Signals In Gold Prices And Beyond
Basso says respecting the price points you intend to sell at are critical. He relies on automation, treating the sell points as unbreakable rules.
"I set up the indicators … make all my decisions, set my stops up for the next 24 hours and I walk away," said Basso. "I could fall off the Earth and the internet could go down, the power could go down, but I still have my orders in from today for all the way through tomorrow."
"Every single position in your portfolio has got the same risk and volatility profile," said Basso. "They're like a team contributing on the positive side to the reward — and hurting you equally on the negative side."
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