I smiled a little bit the other day, when I saw the grumpy old men in the corner coffee shop excitedly engaged in a conversation. I couldn’t hear all of what they were saying, but based on the animated pointing and gesturing at what looked like a paper price chart of Gold (they still make those?), I knew it could only be one thing: Gold fever. And as a professional speculator, I knew good things were likely on the way for me. It turns out that extreme public interest is a good sign of a top, at least a temporary one.
Nothing in the futures market captures the capitalist imagination quite like Gold. Ever since the run up in the early 1980, amateurs have been waiting for the price of Gold to explode again. Waiting and hoping, with a fistful of dollars they want to quickly double or triple.
And it is true – you can make a lot of money fast with Gold, especially Gold futures. In just the past few months, if you held only one futures contract of Gold, you would have made about $17,000, which for most people would easily double or triple their account size.
But, don’t forget that the futures market is a zero sum game – not including commissions, for every dollar someone makes, someone else has to lose it. And if the people losing recently are professional traders, you can be sure that they are waiting for the right time to get it all, and then some, back.
Like a good hunter setting the proper trap, professional speculators are lying in wait with their bag of tricks:
Obvious Trend Up – when everyone can see the trend is up, it makes it very easy to think like the crowd and join them in buying. The thinking among new traders is that the sky is the limit for the price of Gold. Professional traders know all trends end, and they already have their trading plan in place for when that happens.
Heightened Volatility – For small fry, newbie traders with small accounts, high volatility is a killer, both financially and emotionally. And professionals know that. There is only so much up and down price action a small trader can take, before just giving up entirely. And usually, the small trader gives up right at a turning point – the worst time.
Classic Chart Patterns, Technical Indicators – Maybe it is a range breakout, support/resistance lines or a simple moving average crossover, but pros know exactly what most new traders are looking at for both entry and exit. Knowing in advance when many people will enter or leave the market is a tremendous advantage. So, rest assured that whenever you get in or out, some professional will already have figured that out.
Now, I can’t say the professionals are responsible for these tricks, but they certainly see them. Plus, they know how most new traders react to them, and they have a concrete plan to take advantage of it. Do you think the old guys in the coffee shop have an exit strategy already figured out?
The key point to remember is not to get caught up with Gold fever, and realize that you likely will be trading against people who do this day in, day out, and have done so for years. They are pros at taking the money of new traders. Having been a new trader once, I speak from experience on this.
So, if you are thinking of entering the Gold market for the first time, be very cautious. There are a lot of traders who know you are coming. And they are smiling.
