Arguably the best Gold trading strategy to build wealth
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Having covered my Bitcoin trading strategy in a previous video, today we look at a simple but effective Gold strategy.
In the Bitcoin strategy we showed how by using the weekly and daily mack dee in combination, we were able to turn a 10,000-dollar investment into over a million dollars with just 12 trades.
Gold on the other hand is considerably less volatile than Bitcoin, and therefore our approach changes accordingly. The principle however remains the same, we aim to follow the trend on the way up and exit the trend on the way down, effectively providing the platform for favourable risk reward.
In the Bitcoin strategy we used the crossing of the weekly mack dee to define the trading window, and then used the daily mack dee to trade within this window.
In this gold trading strategy, we simply use the monthly mack dee crossing and the relative strength index to initiate a trade.
The strategy is arguably more of an investing approach as opposed to an active trading strategy, it is a slow passive method for accumulating wealth, ideally situated in a longer-term portfolio tailored to compounding returns.
First, let us look at the historical performance of a buy and hold strategy for gold.
We assume an initial investment of 10,000 dollars back in January 1977. As of today, the investment would have increased to 128,000 dollars, equivalent to a compounded 1280% return. The average annual return for the 44-year period was 7.5%.
For me however, enduring a 20-year period of declining returns, or even a sharp near 40% drop, is simply not an acceptable strategy, let alone the consequential opportunity cost.
But what if told you we could have avoided these large periods of drawdown whilst being fully invested within these green periods ….
The method is simple; If the monthly mack dee line crosses above the signal line, whilst the relative strength index is above 50, we enter a long position, and when the monthly mack dee crosses down below the signal line, we place a stop order below the closing candle.
Before we present the comparative results of our strategy against a buy and hold approach, lets look at an example of the last trade taken.
In March 2019 we see the monthly mack dee cross and close above the signal line, we can also see the relative strength index is at 55, above the minimum 50. This is a buy signal, and we take the trade.
As of today, the monthly mack dee has crossed and closed below the signal line, we therefore place a stop underneath the wick of the closing candle.
The relative strength index is an important addition to this longer-term strategy, we can see here the monthly mack dee crossed above the signal line, however the relative strength index was only reading 41, below the minimum 50, therefore it was not a qualifying position and we stayed out of the trade.
The price continued its decline the following six months.
The relative strength indicator can be useful, and depending on the market environment it can be used in different ways.
The common belief is that if the indicator drops below 30, it is suggesting and oversold price, whereas if the indicator moves above 70, price is deemed to be overbought.
If you have a strategy which is buying pullbacks in a longer-term uptrend, then buying on an oversold signal could be useful.
However, if price is in a longer-term downtrend, its important to note that prices could remain in oversold territory for a long period of time. Therefore, in a trend following strategy such as this we want the relative strength index to show us strength, not weakness. We do not want to be in a trade which is being sold or even oversold, we want price to be in accumulation.
In an uptrend prices can remain in overbought territory for a long time.
So how did this strategy perform over the last 44 years?...