Wednesday, December 14, 2011

Anatomy of a trade.

Covered my gold short in  GLL this morning. It is always emotionally difficult to let go of a trade that worked well because I know I probably didn't sell at the high. Sold GLL at $19.00. I had bought in four tranches starting at $16.18 on Dec. 1st, $16.10 on Dec. 2nd,  $16.82 on Dec. 8, and the last at $17.70 on Dec. 12 for an average price of $16.70. Except for the second purchase all of the buys were at a price that was higher. That meant that the trade was going my way and I made money from the start. Buying this way is easy to do emotionally. I always consider a trade a process of establishing a position and if I keep my average price below the price that the stock is trading I will have a cushion to protect me if the trade goes sour. This is controlling risk. Although I had a high percentage of my account invested in this trade I felt it was not a risky trade because of my average price position and due to the volatility that was the norm in the gold market. The idea for the trade was the very defined trendline that was evident in the gold market and that I thought there would be many sellers if that trendline was broken. The recent strength in the dollar was another factor. And the clincher was the intraday selling that I saw in GLD, and the lack of volume on the run up around Dec. 1st.
My "edge" is watching and interpreting the intraday trading action while considering the longer term technical factors. As I have stated above. I don't know what gold will do in the short term from this point on. There may be buying at this point due to the previous consolidation back in Sept. It may continue to go down from here also. But I don't have strong conviction.
If a person was into a trade like this for a longer term trade it would be wise to not have such a big position on. That would make it easier to hold for the long term. But I trade short term because that is what I do best at. It is important for me to remember that to be profitable. Of course there is always anguish when I sell and then watch a market keep going. That happens. But I traded my "edge". And that is what is important. And this is the hardest thing to learn.
Now it is time to watch and wait for the next good trade, and avoid the impulse to take the bad trades.
It is kinda funny how the good trades are good from the start. The trades like this are the ones that I just know from the beginning are going to work. There is no real doubt.
The charts:


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