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Willie Wonka's Gold Roadmap

Stewart Thomson
Jan 29, 2009

Editor's note: This is a re-write, from the author, of the original submission entitled Willie Wonka. Gold Chocolates?

1. The professional investor looks for real tools to manage the effects pain and pleasure they are feeling has, on the actions they take in the market.

2. One of the great real tools for managing fear and greed in the gold market is a "fellow" I refer to as Willie Wonka.

3. The Williams Oscillator.

4. The simplest tools are usually the most helpful. And the Williams is one of the simplest. And most misunderstood by gold investors. Without getting too technical in the calculation, it indicates whether price is overbought or oversold. In plain English, whether price is relatively high or relatively low. As a gold investor, even if you are not placing trades currently, you want to know where the gold price is on the gold map. Williams gives you a very accurate map, if you know how to read it correctly.

5. Here's the daily chart of gold. Showing no other technical indicators but the 14 series for Williams. I like to look at an indicator in isolation in addition to mixing in other indicators. It is possible to make money trading gold with just the Williams indicator. As the gold price rises, so does Willie. As price falls, so does Willie.

6. Many technicians in the gold market say, "but there's too many gyrations". Hence the term "Willie Wonka". I agree that Williams has many false signals and often gives signals too early or late, using the textbook and even most modified versions of the indicator.

7. What most gold technicians do when an indicator is telling them to sell too early is either hold their positions to outsmart the indicator. Or they adjust the time series of the indicator.

8. Certain "rules of thumb" for Williams have emerged. One popular one is to wait 5 days after the indicator rises to the classic -20 overbought zone before selling and to sell only if the gold price itself has turned down. That allows more reward/profit, potentially. And more risk... for sure.

9. A second play is to wait for the indicator to rise/fall across the -50 line before taking action. Active gold traders complain that is often too slow.

10. Personally, I find 3 days in the overbought or oversold zone to be a highly reliable marker for taking action.

11. Now I should address the creation of Williams. The Williams oscillator is named after legendary commodity trader Larry Williams, who created it. I know many traders are frustrated with the use of the indicator and have left it behind and now rely almost exclusively on the macd on the daily charts. However, as many oil traders can attest, the recent total failure of the macd to work properly in the oil mkt after generating a buy way up at $60, shows the macd may not be so invincible as once thought. I would argue the Williams is a much better way to play oil right now. Oil traders are now wondering if the beloved macd will fail them on the weekly chart as well, which just gave a huge buy signal. The point?

12. Think big. Act small.

13. The Williams is shorter time frame indicator than macd. Allowing traders to take advantage of what Edwards and Magee term the minor trend. All market trends involve minor, intermediate, and major action. Minor trends, by definition, are aprox 1-3 weeks in length. Look, again, at the daily gold chart.

14. Do you see what Willie is doing? Willie is calling your attention to the minor trends. Do you see what Willie is saying right now about the minor trend for gold? I do. I have suggested using a 3 day lag before taking action. No matter how you try to tweak the indicator, it will never be perfect. Most gold investors then go to Plan B. Stop losses. If you are using leverage, you HAVE to use stop losses. Or you could go bankrupt, losing more than you could ever repay if prices gapped thru your stops.

15. I don't use stop losses. I have a 100% commitment to gold. I am not 100% invested in gold. I am 100% committed. Meaning: I'm prepared to buy gold and gold stock all the way to zero. By prepared I mean... I have orders in the market to do that. Many investors are 100% invested in gold. Many are more than 100% invested. That is a mistake. Be 100% committed to the world's lowest risk investment. Not 100% invested. Can you withstand severe price weakness that you failed to predict? Perhaps yes. Perhaps no.

16. Larry Williams is a trading master. You may not be. Applying the tactics of a trading master to your investment, will likely cause you to fail. Larry Williams has an iron stomach. Do you? You must modify what a master does, to suit your own personality. If you whip yourself into a frenzy, put on a Larry Williams iron stomach mask, and start trading commodities with big leverage, I would suggest it won't go very well for you, to put it mildly. When Willie crosses into overbought, this should be the signal to you, if you are a short term trader, to begin selling. I would argue that you should wait 3 days before doing that, but that may be semantics. What matters, what is key, is the word "begin".

17. Professional investors sell into strength. They don't pick tops. Amateurs do. Professional investors buy into weakness. Amateurs pick bottoms. You must phase in your buying and selling. As price rises, you keep selling. As Willie crosses into oversold, you begin buying. As it moves lower, which you expect, you continue to buy.

18. Entering or exiting a trade with less than 3 buy/sell price points, in my mind, is an exercise in madness. I maintain dozens, even hundreds, of entry points on gold. Take a look at the COT numbers in the weekly CFTC report. The bankers have thousands of bets that gold will rise and fall, placed at a myriad of price points. I suggest you follow the tactics of the bankers.

19. I don't sell gold at a loss. Gold is world's lowest risk investment. My pain threshold is perhaps higher than yours. However, it is a fallacy to believe you need a high pain threshold to trade the market. Especially the lowest risk market in the world. Gold Bullion. Yet most investors throw their gold into the garbage on weakness. Failing to sell strength. Waiting for the "big one".

20. To succeed, you need to trade smaller than you think is rational and layer in your buy and sells. Diversification of price entry to reduce risk. Not by accumulating a giant closet full of gold stocks. That does not decrease your risk of overall failure. It increases it. Diversify across price entry in gold bullion and a few stocks. Not across 500 gold stocks at one price entry point for each.

21. I want to address one more chart. Below I've added in some more series for Williams. Just as I layer in price entry points, short term traders can layer in your buys and sells via "Willie Layering". As one series triggers a buy, you buy a bit. The next series triggers, you buy more. And so on. The same on the sell side. Take a look:

22. The point of "layering"? The shorter time frame Willie leads the next shortest. You should not be looking for the "pot of gold" point to buy or sell. Simply layer in another layer of buys as each series crosses into oversold. And sells as each series crosses into overbot.

23. Looking at the chart, you can see the lowest series on the chart is already approaching buy territory. Any further weakness would trigger an initial buy, despite the fact the longer term series are still at higher levels. The initial buy, which like all buys is on price weakness, is always the smallest position entered. And the profit target is set at the lowest level.

24. In my newsletter, I cover the placement of the exact buy and sell targets using the Williams indicator. The main theme of my newsletter is studying the ongoing battles of the speculators versus the bankers in the gold market, most battles being consistently won by the bankers.


Stewart Thomson
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