GDX (PM miner funds) as a momentum "play"

bee

I define positive momentum as persistent upward movement above a trendline over short, medium and long time frames. The charts below shows GDX over two time frames (long = 7 years) and (short =3 months). By charting and setting some rules I am trying to accept a certain amount of volatility over the short term while trying to capture a short term upward movement spike. For GDX these short term spikes tend to be 20 -30%. The first chart show a number of these periodic short spikes. Regardless to the direction of the long term trend (up or down) these short term spike seem to consistently exist.

My short term rules are:

1. I entry the investment after a "higher lows" trend has been established (I try to confirm this with 5-10 days of data).
2. Any 10% gain is captured as a gain and invested elsewhere.
3. A 10% drop from any rolling new high is a trigger to end the short term investment.
4. I re-entry the investment after a new "higher low" trend has been re-established (again, I try to confirm this with 5-10 days of data).

Here GDX's long term chart showing these many short term "spikes" (a 20-30% movement in these short spikes).



Here's the last three months (25% upward spike movement). Over the short term, GDX has been making "higher lows" in a pretty consistent manner. You can see it has bounced off the trend line I've drawn a number of times over the last 3 months. This week it is testing the short term trend line again and actually seems to have broken through. I am using GDX's price of $25 (which is 10% below its rolling high price of $27.73) as a potential trigger point to close out this momentum play. If it bouces up above the trendline I would be encouraged to hold this position. I'll see how this works out by weeks end.

I would be interested in hearing from others who use a momentum strategy for all or part of your investments (speculations).

cman

@bee, you seem to be reinventing technical trading with your own home-grown empirical observations. All of these observations have already been quantified and formalized in terms of moving averages, Bollinger bands, trend lines, convergence and divergence, etc. Suggest, you read a good primer on technical trading.

It has been so studied that I would be skeptical of anyone coming up with anything new in this graphing and charting. Most new things work and then they don't anymore.

My conclusions after studying these is that none of them provide a reliable indication EXCEPT as a self-fulfilling prophecy when enough people follow and act on it. The support and resistance lines work more often than not precisely because enough trading is based on it and self-sustain it. This is not very different from fundamentals based trading which works as long as enough people believe in it and act on it to influence the markets.

So, my approach to this is not to do more reading of tea leaves to detect my own indicators or signals but rather exploit the herd behavior of people that do technical trading. Find the most popular technical indicators and use it as an indicator not because it has some magical crystal ball powers but because you can depend on the herd behavior based on the indicators.

In a way, it is like front-running buy and sell technical indicators because enough people are going to act on it to influence the markets. When enough people start doing the same, then this strategy will not work any more.

Kaspa

I have done some momentum trading of my own over several years. One cautionary note is not to use volatile, narrow classes like gold miners. Institutional investors/big money can move in and out of these relatively quickly. You can get whip-sawed. It is better to stay with less volatile, persistent trends than volatile shorter-term trends. You should calibrate your exit stops based on volatility (you can only go by historical as an estimate anyways) over the time-frame of your expected trading scale (hours, days, months, etc.). Do some back-testing to see if your strategy can work. Back-testing is not a guarantee it will work in future, but at least it will eliminate some ideas that have high likelihood of failure. If you still want to trade, make sure you size your positions so that you can stomach the expected loss.