How to Trade when Silver Channels

April 20, 2011 | By | Reply More

It seems timely to discuss a trading activity when our favoured investment vehicles, silver and gold, may lose the momentum that has propelled them sky bound for so long.

Historically, May and June have not been months when either metal has shown much volatility. The summer holiday period follows when many traders pack their bags and markets generally slow down volume wise and may carry over to the precious metal sector.

Nevertheless us gold and silver afficianados like to keep our interest up and what better way to keep us on our toes than regularly trading the two metals. If history repeats itself then how to trade when silver channels becomes relevant.

Price Bounces

First of all what exactly do we mean by channels in a trading context? Very simply when any tradeable stock, commodity, bond, currency, etc., keeps to a price pattern that repeats itself over and over within a period of time with the same, or near same, highs and lows reappearing it is said to be in a channel. It is not showing any upward or downward price trend. Support and resistance stay parallel.

Why we will use SLV

We have chosen the iShares silver ETF (SLV:NYSE) for our example and will be the vehicle we shall use ourselves if the opportunity arises. The important functions we are looking for is a fully tradeable vehicle to access our silver trades with affordable price perameters. With SLV we expect the opportunity, if it arises, to be within a range of $40 to $50  a share.

Maximise Profits, Minimise Losses

Here`s how easily the trade works.

Once a channel has been identified, we like to see up to four to five trading days, sometimes less, where the price bounces up and down within the same limits. Our intention will be to buy when the price bounces off the bottom of the channel and sell when it bounces off the top.

You should wait to see that it will not make a significant  break down through support before buying, if it does then you should not take the trade as a channel opportunity. If it breaks through the top and you are on the buy side  you could make a lot of money!

You Must Use Trailing Stops

As we expect the price of silver to continue up in the course of time you should use  trailing stops to get you out of a trade if the price breaks down through support and to keep you in the trade if the price breaks out of resistance. Always use trailing stops whichever side of the trade you are on.

Sooner or later it will break out to the upside and you will want to maximise your profits when it does.

Technical Indicators Can Help

Again when the price reaches the top of the channel, resistance, you should wait to see if it is a break out or reverts to the channel price. Easier said than done, so look out for double tops, a sign that the price may not go higher and break out into a firm uptrend.

Other signs can be found using candle patterns, volume, open and close bars or a host of other technical indicators. You probably have your favourites, if not search google for technical indicators, and prepare yourself for some intensive, and often contradictory, study. The trailing stop should keep you out of serious trouble.

Try Not To Be Greedy

Nobody has ever mastered the secret of selling at the top or buying at the bottom so if silver does go into a channelling situation best not be greedy, buy the lows, sell or short the tops, and keep a sharp watch out for the likelihood of  breakouts to the upside or an unexpected downside plunge.

Well placed trailing stops a few points above or below the channel depending on your risk appetite will lock in profits and keep any  losses within your acceptable limits.

Trade any Investment Vehicle but be Wary

By trading the silver channel, if it occurs, you will keep your eye on the ball for that anticipated major breakout that can happen any time.

Meanwhile the longer it lasts so those small but constant profit opprtunities in an otherwise flat market may mount up to a substantial sum. You can trade any investment vehicle, some indexes can work very well, that channel in this manner.

Just keep in mind that the market has unexpected tricks up its sleeve to catch out the unwary investor and speculator.

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