Trading
Trading
Not financial advice. See full disclaimer here.
80% of the Twenties Research portfolio is long-term investing. The other 20% is for trading, i.e. to capture short-term price moves. The tools are different but the goal is the same: make money!
The idea behind the trading strategy is to take advantage of opportunities that fundamental analysis cannot flag. Trading enhances returns by creating income for the core portfolio.
Markets don’t go up or down in a straight line. Raging bull markets have pullbacks and bear markets have vicious rallies. This volatility creates patterns which traders can exploits using technical analysis.
Technical analysis provides signals for going long or short. It’s a game of probabilities and it’s valuable for 3 reasons:
Risk management, to define entry and exit points
Psychology, to understand market sentiment and positioning
Timing, to inform when to trade
Risk management is essential to survive mistakes. Psychology is important to determine if a view is contrarian or consensus. Timing is hard but it’s the biggest success factor in trading.
The objective is to identify trades with great asymmetry (risk/reward ratio) at opportune times, ideally when sentiment is extreme.
As an example, let’s use silver since it’s an open trade at the time of this writing (October 5th, 2022).
The price action in gold has historically led bull markets in other precious metals. After retesting the highs of 2020 on news that Russia invaded Ukraine, gold dropped by more than 20% in USD terms. It has been a frustrating trade for most investors because the price has gone nowhere for the last 2 years, despite inflation.
Last week, gold retraced to a key Fibonacci level and found support around $1,640. It closed above that level on Wednesday, suggesting precious metals were due for a bounce. This was confirmed the next day when we took out the high of the prior trading session.
Then, silver quickly jumped from $19 to $21.
Today the price is heading south again. My plan is to get out at $19 (my entry price) in case this is a false start; or, take profits around $26 if the market goes in my direction. So my risk is now zero (assuming the market does not gap down) and the reward is $7. The chart below illustrates my initial thinking on asymmetry:
And the setup in silver on the weekly chart:
Let’s see how this plays out.