Sunday, April 17, 2011

Newsletter Excerpt

As we wrote in our post this weekend silver is very extended but finding a good short spot likely will take some patience.  Right now any quick extension and move up will make things easier, starting with a significant gap-up on Sunday evening and a quick run into this week.   This really isn’t our meat and potato type of trade but we’ll probably be involved at some point trying to find a short in a short-term blow-off top.   It’s extended on longer time-frames but not yet extended on intraday and that’s what we’ll be looking for before we enter.   It could come at 45, 47, or 50, we don’t know, but hopefully when it comes it’ll be a straight panic move up followed by stalling and reversal.  We’d short the reversal and be stopped on top (or give it a set room, for example, 50 cents, etc).   Of course this is easier said than done — what can happen is stock runs, extended from base, and then goes horizontal and digests the move before legging higher.   If you’re short and you see that happen you need to just accept it and take the loss.

We’re in a good position in that we  don’t “need” to do this trade and we can afford to be very patient.   This is not some breakout point that we’ve watched for weeks and which we feel psychologically we “need” to be involved in — this is very much an entertaining tangent of a trade.  We’ll wait until it’s screaming at us to get in; and if the trade doesn’t talk to us and we can’t find that “no-brainer” entry, then we’ll just sit back and watch.

Starting to leave channel and go parabolic — very important not to be early on these type of shorts as stocks can stay parabolic for much longer than one can rationally imagine.   If you don’t know what you’re doing (start early, keep adding) you can easily blow up your account.  If you’re going to get involved have a set number you can lose without doing any real damage to your account.  For example  say to yourself   “Ok, this is a bit of a crazy trade but I’m willing to give it $1500″.    You watch silver go up another $5, start stalling and reversing. You adjust your position size so that if the high is taken out you only lose $1500.   That’s the only way to go against the trend and not kill your account.

For most traders, including ourselves, it is much easier to follow the trend.  Even our support longs (which are short-term reversion to mean) are usually within longer term bullish trends (so essentially they’re also following the trend).  This is a very different type of trade.   Experienced traders only.   If you can’t trust yourself to take your pre-defined stop loss (especially if it happens quickly, the hardest stops to swallow are the ones that happen immediately) then don’t even think about taking this trade.   Basically, if in the last 2 years you’ve broken your rule/plan of adding to a losing position instead of taking a loss/ obeying a  stop then DO NOT get close to this trade.