After this very eventful week, let’s slow down and take a purely technical look at what’s happened to the price of gold.
Following a big pop up on Wednesday, gold quickly fell back and closed below its 200 day simple moving average. This is very important for a few reasons. First, because it closed well below the average, indicating it’s more probably significant.
Second, as we know a lot of trading is done by computer programs. (Also known as algorithms for you techies. Black boxes for the mass media types.) What the programs do is determined by the people putting their money at risk. Most of these folks are pretty decent traders. They know you want a degree of safety in your trading, so you don’t lose all your money in any single trade. At the same time, you want to give yourself the best chances of making money.
So what they’ll often do for longer-term trades is use a series of stop losses. Two stop losses separated by a bit is pretty boring nowadays. Three is not uncommon. Four or even five is kinda the extreme. Hitting each of these values takes you out of a portion of the trade, until you’re finally all out.
The 200 day Simple Moving Average (aka the 200 SMA) is a very common lowest stop for long-term investors. One of my mentors called the 200 SMA “The Final Stop.”
