Friday, April 30, 2010


I’m going to throw out a few ideas for those of you who aren’t emotionally suited to be investors and have to take the traders path. First off realize that miners are volatile. That means position sizes will necessarily have to be small. As a trader you never want to lose more than 1-2% of your total portfolio on any one trade. So you probably aren’t going to be able to trade more than 20% of your account in any precious metal position. Even the ETF GDX can easily swing 10% in the blink of an eye. If you have a 20% position and it goes against you by 10% you have hit your -2% maximum loss on your portfolio. Also be aware that taking 10 mining positions isn’t really diversifying as the sector tends to move in concert.

What you absolutely can not do is take a 100% position with the intent of trading. Locking in 10% losses in a bull market just isn’t going to be a profitable way to make long term money. If you are going to trade then your main concern, actually your only concern will have to be limiting losses (risk control). Let the profits take care of themselves all you care about as a trader is limiting losses.

Next I want to point out something that is or should be obvious but probably isn’t for most traders. Trading isn’t about getting the direction right. Hell that is easy. No trader has any business trading against the cyclical trend. It just doesn’t make any sense to handicap oneself to that extent. This business is tough enough even with all the odds in your favor. Trading against the trend is like playing poker and having to show your hand to your opponents. Sure you might win a few hands now and then but the odds are really high you are going home to tell your spouse you lost the mortgage.

If you are going to be a short seller in a bull market then you better be digging into the fundamentals of the companies you are shorting. If you are shorting in a bull you had better be selling sick or broken companies. Let’s face it that is the only way you are going to get any kind of advantage and even then the pull of the bull can still mask the disease in many unhealthy companies. The financials are an excellent example. Most of them are for all intents and purposes insolvent but because of accounting changes and free money from the government along with implied protection one would have to be crazy to sell short any bank stock.

There were only 10 new lows on the NYSE yesterday. Trying to short high flyers in a bull market is a fools game and as you can see there aren’t a heck of a lot of potential short candidates in bull markets. So unless you are willing to do the due diligence needed to find cancer patients one really should bypass shorting selling. Wait till the bear returns. That is the time to sell short.

No, trading isn’t about getting the direction right, like I said that one is easy. Trading is about getting the timing right. What a trader wants is to time a swing and then get out. If a trade goes against him it’s not because he’s picked the wrong direction it’s because he mistimed the trade. If the trader is willing to be patient the bull or bear will eventually correct the timing error. When a trader stops out he is admitting his timing was wrong not direction, and he thinks he can exit the trade for a small loss and enter another trade where he hopes his timing will be better.

So if one is going to trade understand what you are doing. You aren’t trying to pick direction you are trying to guess timing. Know that history has shown this is very hard to do on a consistent basis and you certainly don’t want to handicap yourself by trading against the large trend unless you have intimate information about the companies you are trading counter trend.

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