Ride The Gold Wave While Minimizing Risk

Now that GLD has taken off like a rocket over the past few days, the question arises “how does one manage the risks?”. Meaning, the risks of chasing a stock and sitting through a pullback right after one buys?

Ever get caught up in the moment only to see shortly thereafter the stock pull back once you are in? Isn’t it at those times you wished you had just remained calm, cool and collected to enable you to get a better fill?

We call that chasing a bus, and every day we hammer the point home — do NOT chase buses, but instead wait for stocks to come to you via orderly pullbacks where you are buying at a lower, risk adverse entry point.

One way that you can start to apply that type of thinking is to implement a disciplined method to the madness vs. getting caught up in the moment. The way we do that is via charts. Employ the use of basic chart reading skills.

We use two types of chart patterns a lot to help us not get sucked up in the hoopla. The two best patterns that we have found to do this are called POH’s, which stands for Pullbacks Off Highs, and a variation, First Thrusts Up.

Below is an example of what we are talking about as applied to a daily chart:

Now let’s zoom in to GLD via a 60 minute time frequency chart for a moment:

The other way we avoid trading errors is by the use of risk management techniques. Controlling your trade size and the use of charts allows one to minimize risk. We can’t stress enough how important this is because we all know that at times stocks go south on us. This is just a fact of trading and nobody on the planet ever hits 18 holes in one. However, when you do get that big score it really gives a boost to your golf game / equity curve and through a proper trading plan these holes in one are inevitable.

By allocating no more than 5-7% of one’s portfolio to any one stock, should a stock go to zero (which won’t ever happen, but we say this for illustration purposes), we lose just 5-7% of our portfolio. If you have a balance of $25,000, at 5% you are only investing $1,250 in any one trade. If the stock gets chopped in half, big deal, you lose $625, but still have $24,375. Hardly worth getting emotional over. The same goes for a portfolio of $100,000 where you are investing $5,000 in a position. Should it get cut in half, you lose $2,500 and have $97,500 left for other trades.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

These are extreme examples, but it shows you that even if something extreme were to occur by practicing proper risk management, it takes your emotions out of the equation and allows you to make objective buy and sell decisions based on what the charts are telling you vs. operating from a chicken little the sky is falling mentality.

In stocks, your most important asset is YOUR MIND SET. You have to protect that and operate from a non-emotional, trade what I see mindset to truly enjoy success in the market. You truly are a product of your last three trades.

So now that we covered a bit of GLD, let’s take a look at the Gold Miners ETF (GDX) for a moment in multiple time frames and chart frequencies.

As you can see when you compare GDX to GLD we see that GDX looks like GLD just before it broke out to the upside (sky blue lines). This is why GDX looks more appealing to us here vs. GLD which has already broken out. Both have made short term thrusts higher out of POH’s, so they are both overbought in the short term.

So what do we do about that? Simply allow them to pull back off current highs and come to you. Now some will, some won’t (most do if you are patient enough) but you have to have a method to the madness, otherwise you will be privy to every little whim that shows up in your trading world — it’s all about discipline.

These are the things we talk about every day on this site. Not only do we touch upon the metals, we cover this same type of style on the indexes and individual stocks every day because we know opportunities exist in alternative markets. Proper portfolio risk management also demands to diversify into non correlating sectors.

So now let’s apply that to an individual stock, shall we? Below is an outstanding example of what we are talking about that we hone in on daily.

Now you know why we say in uptrending markets the POH trade pattern is the only pattern you’ll ever need to know.

Disclosure and Disclaimer: THESE ARE NOT BUY RECOMMENDATIONS! Comments contained in the body of this report are technical opinions only. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed.