Silver Reversal Study & Reader Question

(click for a larger and clearer chart)

Reader Question: How were we supposed to know it was a reversal in silver, even though everyone was talking about it?

Answer: I think intraday reversals can be tricky, so don’t feel bad (unless you like feeling bad, then really feel bad). The intraday reversal is depicted in the candle in the red box in the chart above. One way to look at it is after a large spike up in price, does the price hold above the open intraday, and does the price close above the open.

Look at the chart below (Silver hourly):


(click for a larger and clearer chart)

Silver opened around $47.20 and rallied up to $49.20 — then it plunged in three large red candles. The red arrows point to the approximate open price. Once the contract trades through that price, it has given back the day’s work. Since the market had been on a fantastic bull streak, your job is to be extremely diligent in taking losses quickly and protecting your capital.

Many long traders place their protective sell stops right below the open ($47.20) or within the opening range ($47.20 – $47.60) . In markets like silver that have gone parabolic, some traders short tiny positions of 0.2% of equity (2 tenths of 1 percent = .002), for example, at these same prices in order to capture the deluge of selling pressure that they believe will occur once this treshhold is achieved. If the sell off is extraordinarily violent, the very small position will be gigantically profitable.

As always, the goal is to trade small and keep your losses small so that you can make outsized gains when the opportunity for very asymmetric payoffs become available.


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  • LMTentarelli

    Michael, the question is a typical trader’s question…

    how do we “know”…

    the proper question is “how do I trade it properly”? which is how you answered it…

    proper bet sizing, and strict risk management…

    in trading we never really “know” for quite some time…all we can strive to do is have a plan in place to trade properly, and eliminate emotions…when we trade properly the wins will follow…

  • Anonymous

    I don’t know anything other than how I feel moment to moment.

  • Manuelbravochico

    Interesting side note. Looking at some of the biggest cta funds, I see most are up low single digits ytd. Some are still negative ytd. Looking at this chart and some other commodities, that somewhat surprised me. Specifically, it tells me that a lot of the big players have relatively small positions in silver.

  • Anonymous

    I haven’t looked, but most cut positions as vol increases.

  • Anonymous

    thank you for the catch. Fixed now.

  • Manuelbravocihco

    I’ve seen this before with other commodity futures versus the ETF.
    SLV busts into new highs today. Only liquid SI futures contract that made new highs today were the illiquid ones. June 11, March 12.

    Not sure how to interpret, but has my attention.