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.