Risk Is Not a Four Letter Word
Thank you for all of the great questions/ideas/topics that you guys/gals have sent me.
Over time I’ll get to them either through the blog or directly back to you.
Today, a letter from a gentleman is shown below along with the reply from me. It should answer some common questions posed. It might also raise some new questions I assume.
You speak often of managing risk. Sell into strength, buy on weakness onan upward trend. I am currently into a number of silver mining stocks,and they are doing quite well already. Most are long, and intend to rideit out for the duration.
I do have a few speculative plays in Leap options, due to expire in early’17. One has more than quadrupled, and I am thinking about selling halfthe position to preserve principle, then play with opm. You havementioned that there is a likelihood of a dip in metals before the lastbull run. Any ideas on timing? If brexit passes, I see it as a hugeboost to the dollar.Opinion?
Also, I’ve been reading up some, and have come across several opinionsthat the current run in metals is a head fake. “No bull run can occurunless it is led by silver”. It’s a matter of percentages and buying
pressures.Do you believe this to be true?”
My reply and then some more explanation.
“I would never dissuade anyone from taking a profit. Remember, what does taking a profit mean? You’re cutting back on a position, therefore reducing RISK. Having said that, taking partial (or full) profits is an art, not a science. But even successful traders constantly whine about “leaving money on the table”. You get “better” at it over time, but it’s a constant frustration in this business.
As to Brexit, please learn to never use the word “if” nor to have an opinion (guess) as a trader or investor. But when it comes to known upcoming events or econ. numbers, etc., I only use them in reverse.
Meaning when I believe that a market is in a bottoming process, I would use an econ. number, which almost everyone thinks is bearish, therefore they’re selling, as a place to step in and buy -provided that the market trades back down to support. Actually I have a method that I believe lowers the RISK even more than just buying at support. And that is I usually will only buy below support when the sell stops are being executed and thereby forcing people to sell. It’s something that I developed as a floor trader, But you have got to have a ton of confidence in your work and preparation (and two bigger than average “ones”) or you could get killed. To use as an example, look at my Dec. 2015 outlook and I’ll copy exactly what my outlook for gold was then –
“I’ve been urging listeners to avoid buying gold since Sep. 2011, except for a trade. However, that situation is slowly changing. In the last update, I said that I still expect more new lows in gold, which has occurred. So now what? Gold is definitely under accumulation by big capital, despite the obsession with gold manipulation, they’re using weakness to buy. While I still expect sub $1000 gold, so does just about everyone else now, even some of the most bullish gold bugaroos. So begin to SLOWLY accumulate gold, but do NOT buy into the price rallies. Call THE master of numismatics Mr. Gauss and work out a buying plan.”
Why did I say that last Dec.? Because, I believed that we were in a huge bottoming process and that we were nearing support below the market. There was a Fed meeting in a few days and I would use a potential interest rate increase and a knee jerk selloff in gold to buy, which is exactly what happened. Of course, I’m sure hardly anyone bought gold there below $1050, but I can tell you, based upon my technical work, who did buy then. Big capital moved in once again which I was trying to convey to folks had been in the process already.
As to a head fake. This is exactly why I’m spending the time to do this blog. Because, I want people to stop reading all of the opinions and guesses all over the place about markets and to begin to think like a successful trader who only relies upon him/herself. As to myself, I’ve been repeating and repeating that I’m now approaching gold as to being back in a bull market. In a bull market you buy at support. Can I be wrong, of course. Can gold go to a new low, of course. These are markets and markets are about probabilities. And I could care less what anyone else says. I’m friends/friendly with some super successful traders and we usually agree about markets, and when we disagree I’m certainly not thrilled. But as long as my work “tells” me to do something, I ALWAYS stick to it.
Hope this helps and gets you to think differently.
More explanation – In the question “Leap options” refers to an option contract with a much longer term life. And “opm” is an acronym for other peoples money. And please refer to my 5/25 post where I very basically explained my trading methodology/approach where I said –
“Today I’m going to share 90% of my method for succeeding in markets and how to use that to trade current markets. This is exactly what gives one the ability to UNEMOTIONALLY ANTICIPATE markets vs. what most people do, which is EMOTIONALLY REACT to markets.There are 3 parts to the method and then a brief explanation of each part.
#1 – This is by far the most important thing you could ever learn about markets. You will NEVER make money in markets if you don’t understand this following concept.
Determine and Respect the trend of the market. Keep repeating that to yourself. And there are 3 types of trends – up, down, or sideways. Sideways trends are either forming a top, forming a bottom, or are just pausing in the current trend. ALWAYS trade with the trend – in an uptrend, ie, bull market you should buy, and in a downtrend you should short or be out. So just understanding this one concept can neutralize almost every mistake that you could make.
#2 – Buy at support, which is simply previous lows below the market and sell at resistance which is previous highs above the market.
#3 – Have the humility to accept when you’re wrong and get out.”
I repeat that because you have to understand that this is the basis for greatly minimizing RISK. This is the numero uno step and basis for success in markets. That methodology will also greatly increase your probabilities of making money on each trade/investment. Please learn to approach this business professionally, smartly, unemotionally, and without guessing where markets are going. And don’t allow all the clowns populating the internet, who don’t have years of experience and proven success, to cloud your judgement.
As for current markets, my belief remains that the Dow is in a huge bull market in the long term, but the intermediate outlook continues to entail substantial risk. And as per the aforementioned methodology, when I believe that the TREND is down, price rallies into resistance are high PROBABILITY entry points. In the short term, we are beginning to see that the recent selling is being accompanied by an increase in volume. That means that the supply is increasing as the price falls and that is bearish.
And as to gold, read my previous posts, nothing has changed. I could care less about Brexit,etc. There’s still a chance of a low below the recent $1200 low, which is now the short term support point, but I will very likely use lower lows to add longs.
June 14, 2016 @ 3:56 pm Dave
Thanks so much for being here for ORN.
Now if I may share some thoughts. We the public have limited history to look back on concerning long term gold bull markets. Since a top of 850 in 1980 the market has fallen to 252 in 1999 and then rose to 1895 in 2011. Those were all closing prices. The fall from 1980 to 1999 WAS 70%. A fall of 70% from 1895 would be 568 and a fall of 50% would be 947. All this with the understanding that the price of gold is obligated to hit neither mark. Im just feeling it’s abit early and people will be surprised by how deep the bottom might be.
June 16, 2016 @ 7:17 pm scott
I agree with everything that you said except for your conclusion. You believe that gold is still in a downtrend, I believe the opposite.
It’s what markets go round and round — buyers/sellers, bulls/bears. It’s great to see people doing real research and coming up with a plan, but we’ll see how it all plays out. I’m a trader and I can do is place my bets and let the market let me know if I’m right (profits) or wrong (losses).
So my strategy right now is to sell a little bit of gold into the rallies at the resistance areas, as today’s high was. But my main focus is buying gold into the bigger price weakness. If you believe that we’re in a bear market, I hope that you took advantage of today’s rally to $1315 to short a good chunk of gold, because it was a wonderful low risk area (above $1310) to do that. But I certainly agree that I would not buy gold presently.