Trade In Gold
by David S. Landry, CTA
Large moves often follow low-volatility environments. Here's
one method of combining volatility indicators and pattern
recognition along with trend-following methods to capture a
breakout in the 1997 gold futures market.
A simple review of a market chart
will illustrate that markets trade
in periods of lackluster sideways
price action and then
abruptly adjust to new conditions
by trending to another price
level. The goal of many traders
is to trade these short-term trends
profitably. Technical analysis
can aid you in identifying potential trades based on the
concept of the market moving from trading ranges to trends.
To demonstrate, I'll walk you through a trade in the gold
market based on a set of technical indicators.
First, let me define the formulas I used for my analysis (see
sidebar "Formulas" for the calculations). Having set up my
indicators, letís walk through the steps for making a trade.
The first step is tracking volatility. To measure volatility, I
used four-, six- and 10-day historical volatility indicators inspired
by the volatility work of Larry Connors. I added two additional indicators to the historical volatility indicators. I ran
an average of the three by adding each of the four-, six- and 10-
day historical indicators together, dividing by 3, then calculating
a 12-day exponential moving average (EMA) of that result.