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Sunday, April 25, 2010

THE PROBLEM WITH TRADING

Here is the problem with trading. Most of the time any market will be in consolidation mode. Gold is a good example.


For the last 5 months gold has done nothing but trade back and forth with no defined trend. It's very tough to make money in those conditions.

Now don't get me wrong somewhere someone will have traded this perfectly. They will have stumbled upon the perfect system to catch each little wiggle. Often they will proclaim their superiority loudly for all the world to hear.

Unfortunately there really is no holy grail of investing and the system that happened to work this time will almost always fail during the next period. It's just how the markets work, conditions change. So unless one is lucky enough to guess what will work before each new period in the market what invariably happens is one ends up giving back all of the gains they made when their system breaks down.

The answer of course is to just stay aligned with the secular trend and accept that there are going to be periods when one will just have to sit and watch other people make money. The last five months have been a perfect example as the stock market has gone up while precious metals and miners have gone nowhere.

Know full well that eventually this too will end as gold is in a secular bull market with a long way to go and the general stock market is in a secular bear market with limited upside potential.

So at some point gold and miners will make another big move up and all the waiting will have been worth it. And at some point the stock market will come grinding back down and all those who held on expecting conditions never to change will lose all of their profits.

So one can trade if they must, but do so knowing that the market is going to take away any and every profitable system at some point whether it be a technical system, patterns, cycles, indicators, sentiment, COT or just intuition.

I've watched it happen to countless "traders" over the years. The really good traders survive these periods because they practice excellent risk management. Unfortunately most retail traders when they get on a hot streak believe they have found the secret to the market and risk management goes out the window. That's just about the time the market starts throwing curve balls.

56 comments:

  1. Gary, that chart is a thing of beauty.retesting that neckline (IHS)130 here we come.

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  2. Garry for this reason it is y i say do not touch gold till it breaks the high so the market will tell you that its going higher ,one has to be very humble in the markets

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  3. Until the dollar turns down I dont see much upside for Gold whatever wave it is,was or will be.

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  4. Gary, I know that you are predicting a spike in energy prices (and I assume the attendant equities too?). I see that the OIH has recently caught fire. Do you think that this is the start of something bigger and that now is a good time to put money to work in the oil services field or will the (hopefully) coming correction present a better entry point? I enjoy your blog. Thanks.

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  5. Have you looked at Palladium lately?

    As you know, Palladium (like the other PM's) has been in a Bull Market.

    Since late March, that up trend for Palladium has accelerated.

    I don't know if either link will work.

    http://i40.tinypic.com/eisawz.png

    It does seem that Palladium is beginning a runway move.

    Gold should soon follow...

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  6. T,
    I don't care about a drawdown. The move to higher highs has pretty much taken a D-wave off the table. As long as that's the case then I'm back in buy and hold mode.

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  7. Skogie,
    I prefer to stay focused on the precious metals because I think the energy sector has limited upside before spiking prices crush the economhy again.

    I seriously doubt oil will reach $147 again before the economy comes unglued. Without $147 oil I don't see how energy stocks are going to make it to new highs.

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  8. We should always strive to catch the major pivots in Gold moving back upwards from a correction, and capture profits using stop losses when waves up are ending... can't afford drawdowns just b/c we know gold is going to $5,000. And if/when we miss crucial pivots, those are learning opportunities. For example, with the HUI, I'd try to get at least 20% off each swing.
    -- ie, Iff I missed Feb5th, I should be trying to figure out why I missed it.

    IMHO...
    pH

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  9. LOL easy to say but virtually impossible to do in a volatile sector like miners.

    Stops will just make one take losses they don't need to take.

    No two C-waves are ever identical so there is no way to "learn" form ones mistakes.

    It's a nice dream but ultimately still a dream.

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  10. So Gary, and you fully invested again?

    I am not, and feel like I've been waiting forever for gold to pull back. Still, I'll remain patient.

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  11. Let's face it if gold does pullback significantly you will be worried that it's going to be another large correction and won't enter anyway.

    At some point you just have to get in and quit worrying about drawdowns.

    In most cases every entery is going to suffer some kind of drawdown.

    As long as you can keep the secular trend locked firmly in your mind then it's much easier to just get in and not worry about making the perfect trade.

    Let's face it you just got a $50 pullback in gold and you did nothing.

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  12. I would point out that both gold and the HUI are trading above the 10 DMA and the MA is starting to rise. Neither is overbought on a short term basis and it looks like gold is just starting a new daily cycle.

    Your odds of getting in without suffering a drawdown are probably about as good as they will ever get right now.

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  13. Does anybody know why the Sprott fund (PHYS) trades at a 5% premium to net asset value (NAV)?

    Thanks in advance.

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  14. http://seekingalpha.com/article/191523-sprott-physical-gold-trust-not-really-a-gold-etf-and-a-bad-deal-to-boot

    Unfortunately, PHYS is not an ETF. And its “exciting feature?” Well, that turns out to be a trap.

    Not An ETF

    I define an ETF as an open-ended mutual fund that trades on an exchange and uses a creation and redemption mechanism to keep its share price in line with its NAV.

    PHYS trades on an exchange, but the comparisons stop there.

    The company doesn’t try to hide this. The prospectus states:

    “The Trust is a closed-end mutual fund trust established under the laws of the Province of Ontario”

    As a closed-end fund, PHYS comes with all kinds of warts that do not apply to ETFs. For starters, PHYS was sold at a 5 percent commission. That is, the price offered to initial investors in the fund was $10 a share, but the NAV took an immediate haircut to $9.50, because 50 cents went into the hands of the good folks at RBC Dominion Securities, Morgan Stanley Canada, BMO Nesbitt Burns and other underwriters. ETFs never come with initial underwriting commissions.

    That might not matter to investors who purchase it on the open market, but there are other warts that do.

    For instance, as with all closed-end funds, there is no way for PHYS to issue new shares, which means there is effectively no way for the security to actually track the price of gold. Sure, it might, but if the shares trade at a premium, it’s impossible for an arbitrageur to go buy gold, turn it into shares, sell them on the open market and drive the market price back to NAV.

    PHYS does have a redemption feature, but it’s severely crippled. The PHYS redemption window is only open once a month, and it comes with a lag. Investors who want to redeem shares of the fund can submit a request to the company on the 15th of the month. If the redemption request is large enough (bigger than a single gold bar), the redemption will be processed at least in part for physical gold at NAV at the end of the month (13-15 days later). If you’re redeeming lots smaller than a physical gold bar or just want cash, you get dinged for at least 5 percent off of the value of the fund.

    That’s not exactly a liquidity option. Let’s just say that market makers aren’t lining up to ride this “lightning-quick” 15-day flawed redemption process to ensure that the fund stays close to fair value.

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  15. http://jessescrossroadscafe.blogspot.com/2009/08/navs-of-certain-precious-metal-etfs-and.html

    Link to a good explanation on why there are premiums on CEF versus GLD or SLV. PHYS was not in existence when this article was posted, but the same should apply to PHYS as it also has the physical metal backing its NAV.

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  16. Thanks Jay for the info, much appreciated. I guess the only benefit is the tax rate, at least as Sprott explains it. Not even sure that can be trusted.

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  17. Thanks to you also, 'Return to Rennaisance'.

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  18. Gary,
    You often mention risk management. Do you consider a trailing stop in a rising market adequate risk control, or is there more to it than that?

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  19. If you are going to "trade" then it's all about position size and placing stops.

    You simply can't risk loosing more than 2% of your portfolio on any one trade if you expect to be profitable.

    Of course that kind of risk control will mean you are going to have a pretty tough time making more than 15-20% on a consistent annual basis.

    But it will guarantee you won't lose big.

    They only way to really make the big bucks is to let go of the trader mentality and become an investor. Of course that comes with a steep price. Namely you are going to have to weather big draw downs from time to time.

    And there will be plenty of times when you will have to sit and watch as everyone else makes money ... like now :)

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  20. Will Buy Your GoldApril 26, 2010 at 10:22 AM

    Gary, I believe we have a downturn first before rallying and that includes the pm. Therefore, I prefer to sit in cash and wait. Are you 100% invested now?

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  21. I am 100% invested. I think any further D-wave is out of the question at this point so I'm back in buy and hold mode.

    In theory we should be correcting but it just hasn't happened. So I'm assuming we are in runaway mode.

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  22. Gary, when you say that your 100% invested does that mean you have ALL your capital invested in PMs right now at this moment?

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  23. yes. At this point I'm prepared to hold through an A-B consolidation if that's what this is or if by some chance we are going to get a C-wave continuation I'm positioned for the ride.

    If one is going to freak out if this turns out to be an A-wave with a B-wave to follow then I wouldn't suggest they follow my lead.

    Decide how much you would be comfortable holding thru a long consolidation and then only invest that much.

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  24. Thanks for the honest response, I've gotta say my friend you've got huge balls!!! Good luck to you, yes you've got the secular trend behind you but it still takes some guts to go all in.

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  25. Does anyone here use GoldMoney.com? Any thoughts on using something like the vs taking delivery?

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  26. The cracks are starting to show here....still long dawler...very short equities...flat the yeller junk but patiently waiting for pull back to nibble the long side...

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  27. gary GOLDman!!!

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  28. OUCH. How that runaway move coming along?

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  29. We are geting the test right now. The market has dropped 33 points. Right in the target zone of 25-35 points. If it reverses and continues up from here that would be the third correction all of similar magnitude and a characteristic of runaway moves.

    So we should know soon if this is or isn't going to be a runaway rally.

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  30. Gary .. so the talk today is Greece, Portugal, Spain .. i guess Italy will be nex , and their debt crisis ... the obvious initial move was for a bump in the USD ... surprisingly, Gold has done the same, and miners have held their ground today. Do you think this is sustainable, or , is it better to not take the risk and to cut holdings in everything, incl. Miners.

    Peter

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  31. Well for me personally I'll say what I always say. Gold is in a secular bull market. Any mistimed entry will get corrected. One can drive themselves crazy trying to time the perfect entry and in the process rack up an endless seris of losses that don't need to be taken.

    But if you are one of those people that just can't emotionally deal with a drawdown then you are going to have to treat the gold bull from a trading perspective. That means small postions size and reasonable stops. And more importantly some kind of plan for re-entry.

    The downside is your profits are going to be limited by your risk management. Ultimately you probably won't make much more than 15-20% annually during the bull, whereas someone who can weather drawdowns and invest much larger positions size will probably come away from the bull with many hundreds if not 1000's of percent gains.

    So you have to decide if you are prepared to pay the price required to invest and make the big money or whether you are going to be satisfied with a much smaller gain in return for emotional stability.

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  32. Dollar thingy looks strong today.

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  33. Interesting action today, eh? The miners caught between the pull of SPY and gold.

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  34. Gold is a hairs breadth away from taking out the 1170 high and the HUI is just shy of taking out the recent highs. Looks to me like the general stock market is having no effect on gold or miners.

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  35. For all the grief the trolls give Gary about short term timing in the end he always seems to be right.

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  36. If the SPY contracts, the miners will follow. Forgotten January already?

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  37. I have to congratulate gary for getting back fully invested in Gold, now at new highs for the year. Not many can do that after getting shaken around the last few months.

    Impressive.

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  38. GO Dawler...GO equities to zero...I am flat yeller junk but i am happy you guys are making good today...

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  39. Well, HUI should have been up a lot more today if it were not for the negative pull of the broad market.

    GDXJ was down.

    But I really like the fact that gold has decoupled from the dollar index.

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  40. WHOOOOOSH!

    Runaway not gonna happen.

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  41. This comment has been removed by the author.

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  42. Yep it may have already gone as far as it's going to go. But I still wouldn't take a short position in the market, no way no how. Hey I don't have a death wish :)

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  43. Toby, I mean Gary...

    Miners still way off their highs back in Jan when gold was 1161 at that point. This despite an epic rally in the stock market the past several months. I think they will get pulled down despite today's outcome. (I sense a bit of a run up and sell the news on FOMC)

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  44. So?

    The secular bull is a long way from over. Now that gold is back to making higher highs I'm not concerned with short term moves. Besides any correction in the stock market will probably only be a daily cycle low and soon recovered.

    Where would I be if I got out now while gold was in the process of powering off a cycle low and if miners all of a sudden decided to follow no matter what the stock market does?

    Nope gold has met my four conditions it's time to just hold on again.

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  45. I wish you wouldn't have f'ed with the subs heads with that "unconfirmed" D wave call.

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  46. Not sure what you are talking about. It still may be a D-wave. If gold fails to make new highs and then comes back down it will have been a D-wave into the Feb. bottom and we will be in an A-wave now.

    Hey I wish I could see into the future just as bad as the next guy but unfortunately as far as I know no one can :)

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  47. Gold is looking pretty good after the breakout and successful retest. Interesting to see that it was up with the market down. I've never viewed gold as a safe haven. One day doesn't make a trend though.

    In any event, I think today is at least a pause for the Feb-April rally. FXI broken, EURUSD making a new low and the momentum is too high (RSI and just based on the chart being too vertical). No reason to be long right now as we await consolidation or a retrace.

    http://www.chartsandcoffee.com/2010/04/greece-when-does-a-story-matter/

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  48. Gold's gotta move at least to 1186, using my prediction model. I'm really unsure how much further past that number it could go , however. It should peak 'around' the time that the markets are down. At that time, it'll be the end of the A wave (imo). Until then, adding more on the dips.
    pH11

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  49. Gary, I like your letter and daily charts. One thing I don't understand is why you keep recommending the pm stocks as opposed to the metal or etfs. I bought HL in Jan. when silver was trading at $17.77. OK I was too early, but silver is up 1% anyway. HL? I paid $6.58 then, now it's $5.85, my loss is 11% (and you say HL is one that outperforms). What will silver have to do for me to break even on this garbage company, $20, $25?

    Personally, I think these stinking mining companies can't make money whatever the gold price. Then they water their stocks any chance they get. I have some AGQ (double silver). I am up 30% on this. Next chance I get I am going to sell all my miners and invest only in double etf's. Surprised you don't recommend them. BTW HUI was 402 in April '06 when the gold price was $730. It's only 10% higher now while gold is up 60%. IMO investing gold stocks is a mug's game. I think it's quite possible that you will need $1500 gold before you see HUI get back to the 520 high. All the best.

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  50. I prefer miners because the gold:XAU ratio is still signalling miners are too cheap.

    You have to be patient, at some point miners are going to move back to a more normal valuation compared to gold. If you get out too early because you were impatient you will just end up missing the move when it comes. Don';t make the mistake of thinking just because they haven't done what you want them to do in the time you want them to do it that it won't ever happen.

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  51. Just as an example, from the November bottom to yesterdays close gold was up 71%. Miners during that period were 200%. Some juniors were up over 1000%. You tell me is 200% better than 71%?

    Despite a brief period of underperformance due to the market moving into an intermediate cycle low the miners have been vastly outperforming physical for over a year and I expect it will continue until the Gold:XAU ratio drops back down under 5.

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  52. Mama is suffering from traders disease - short term perspective.

    I always look at the big picture before making any decisions. Gary is absolutely right miners have been massively outperforming gold since Nov. 08.

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  53. Thanks for your comments, Gary (and anonymous). Just frustrating seeing the metal price rise and an individual miner not participating. You are right, patience is required. I should also point out I own SLW and PAAS (which you recommended and have been doing fine). HL is clearly lagging right now.

    However, I think double etf's have a place as you are guaranteed leverage, whereas individual stocks are subject to earnings misses, mine accidents etc. Also as stocks there are not immune should the general stock market decline.

    Finally, I agree gold miners are undervalued but if you look at a long-term monthly chart of the HUI/Gold ratio it looks to me as if the ratio made a high in early 2004 and the whole 2004-2007 range was rather high compared to earlier periods. I could be wrong in my chart reading, tho'. Thanks again. Always enjoy reading the daily comments. (sorry cannot send via my orig. name)

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  54. Double ETF's are certainly an option just remember you are going to also feel that leverage on the way down when gold moves into an intermediate cycle low.

    However I think most miners and especially many juniors will massively out perform even the double ETF's in the long run.

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  55. Thanks. Very true about the leverage working both ways. If silver took a big hit of 15%
    (which it will at some point) AGQ would drop 30% so you would have to be prepared to weather a big drawdown. I find them fun to trade but you have to be nimble.

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  56. Double ETFs are for short-term trading only.

    By their nature, they will not track their benchmark over the long term and lose money over time on a risk-adjusted basis. This especially applies to the double-short etf's.

    If you want leverage to gold/silver without individual stock risk, buy GDX or GDXJ, or a diversified basket of stocks.

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