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Gold Futures System Music To The Ears?

02/04/11 07:25:03 AM
by Donald W. Pendergast, Jr.

Some markets tend to trend intraday, while others look more like financial market meat grinders. Using the right kind of trading system can help you exploit the potential in nearly any kind of market.

Security:   GCJ11, YG, GLD
Position:   N/A

Just about everyone seems to be aware of the long-running, monumental uptrend in the gold market, one that is now about 10 years old. Gold market traders, on the other hand, realize that the shorter-term swings and cycles in this highly emotional commodity are far more chaotic and unpredictable, and that a highly disciplined discretionary or mechanical trading system is an absolute must in order to make and retain trading profits. Here's a closer look at an intraday, fully mechanical trading system for gold futures.

FIGURE 1: COMEX GOLD, FIVE-MINUTE. While any kind of intraday trading is inherently risky, attempting to trade these kinds of violent intraday moves in the gold futures market without a proven system might just be akin to financial suicide.
Graphic provided by: TradeStation.
The Eldorado gold futures trading system has shown real promise in hypothetical, walkforward mode, and has demonstrated a reasonably good propensity to identify tradable reversal and breakout areas in a variety of market conditions. I can tell you from experience that intraday trend-following methods in the gold and silver markets are exceedingly difficult to trade, much less actually generate a consistent profit from.

If you look at Figure 1, a five-minute chart of the full-sized COMEX gold futures contract (April 2011 contract, ticker GCJ11), you can see just why this is so. This market generates more thrash and internal chaos than a heavy metal show (and just about any other liquid futures market), making it very hard for trading systems that depend on sustained directional movement to actually earn any meaningful profits at all. In the case of gold and silver futures, swing trading systems and long-term position trading systems tend to deliver more reliable profits for trend-followers, so keep that in mind when shopping for your next precious metals futures trading system.

That said, the Eldorado gold futures system tends to go either long or short early in the daily session and is always flat by 1600 ET, rarely taking more than two trades on any given day. Lately, the system has been focusing on the short side of this market, and for the last two sessions, it has done a good job of extracting profits from this volatile market (no, it doesn't win every day! Be serious). I don't know about you, but the prospect of attempting to daytrade this market without a statistically viable system would not be very appealing to me -- it's just so all over the place, seemingly lacking any kind of rhyme, reason, or overall harmony. Like some metal and rock music, the "sound" of this market is dissonant and edgy, and only a trained "ear" (that is, an appropriate trading system) can even begin to appreciate the potential contained within its own unique structure.

I was so impressed with the initial, raw test results for the system that I thought about calling it the "secret recipe," but then realized that the name might already be copyrighted, seeing as how the musical genius called Buckethead had already dubbed one of his shred guitar albums with that particular moniker.

For system traders, please remember that raw backtest results are one thing, but the process of optimization, stress testing, and forward-testing will ultimately determine if Eldorado will be able to perform as well in real life as it has in the statistical-theory world of computer-generated modeling and backtesting.

Highly focused, goal-oriented repetition (otherwise known as practice, practice, practice) is the only way to achieve success in any field, whether it involves playing 64th notes at lightning speed on a Les Paul guitar or designing a reliable futures trading system that can consistently generate trading profits in a market that looks more like a World War II minefield than a level, rational playing arena in the financial markets.

Only after it produces consistently profitable walkforward, out-of-sample results will I be able to determine if it's a virtuoso performer or just another three-chord, one-hit wonder.

Stay tuned for further updates, and we'll see if this system has what it takes to make it in the world of gold futures trading. Or not.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 02/08/11Rank: 5Comment: 

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