The competition. You are long the Euro against USD. You are buying the Euro every 1 point down and selling every 3 up, with your trading position. Picture this situation: the euro rises 2 points from your buy, but then it looks bad. You get a sense of great discomfort, after reading a rumour that Goldman Sachs has apparently gone short the Euro, just as you’ve gone long! You think, “should I book profit now and outsmart my pre-set profit taking points?”
Now let’s look at “you” again. In the same situation. Only this time you are also short the euro in another account. Now the mental stress is off. You can wait for either the long or short position to hit it’s profit taking mark.
I already know your next question. It is: “OK, stewart, but how do I make money with this? What I’m making on one position, I’m losing on the other!”
Not so fast Sherlock….Yes, you are long and short at the same time, and at the same price entry points. But not in the same trade size.
This is exactly how the bankers operate. If gold is around 940, you can begin a buy and short program, both at 940, but the dollar value of the long positions must be greater than the short dollar value of the corresponding positions. I go into more detail on the ratios below.
Technical indicators can be of great assistance to you in setting up your buy/sell programs. Focus on general indications more than precise “buy” or “sell” points. Focus on a general 70% long exposure to any major mkt you target, so your buys are generally bigger than your sells. The overall long position must remain bigger than the short position 100% of the time, in all gold bull mkts.
I want to look at a couple of scenarios to build your positions. But rather than focusing on the euro, I want to focus on gold and the US dollar. With an eye to building a 70% long gold and 30% long US dollar. Here’s the weekly chart of the USD. It’s very oversold, so it could be an interesting time to look at working on USD with a professional pyramid buy program.
Just as I layer or “ladder” into positions in a technical pyramid formation, I use technical indicators the same way. Above you can see the 3 series of RSI all oversold, with the 4 series showing a possible upturn. The stochastics series are deeply oversold.
Here’s a second look at the chart, with the longer term MACD and TRIX indicators. Take a close look at the 4,8,9 series and the 7,14,9 series for MACD. They have already moved to buy signals. So has the 5,9 Trix. Notice how close price is to the green Keltner demand line. The keltner lines are like green river banks on the “price river”.
The key here is this, and this takes a touch of thought:
A USD buy signal is not a Gold sell signal. You sell gold ONLY to take profit on it, and do so into strength at a higher price than you paid. Not at a loss because the USD gives a buy signal. A USD buy signal is what it is: A signal to buy the USD and nothing else.
You could go for 70% long gold and 30% short gold, but that is far riskier than 70% gold, 30% USD. Remember, the 70% refers to a 70% maximum risk capital allocation to long gold positions, of a 100% “risk pot”.
I allocated aprox 1/3 of my gold risk capital to an inner gold core position, or about 30%. Any gold short positions I enter should never put me net short gold in a bull mkt. Not even close.
In practice, I rarely exceed 1/3 of my actual metals positions with shorts AND USD long positions combined, and if I do, it’s maybe by a couple of percentage points. I’m interested in making a real profit from the rises and falls in gold, but not in attempting to make all the theoretical money that can be made from a mkt swing.
Here’s the gold weekly chart, via IAU-n, the comex gold bullion ETF:
Most of the technical indicators are what I term “midships”. Price is around the centre of the green keltner lines. RSI is around 50. MACD and TRIX series are around the “O” line. Stochastics are around the 50 level. Here’s a look at MACD and TRIX:
Price itself is in the centre of a symmetrical triangle, and near the point of either breakout or failure from a head and shoulders consolidation pattern.
All of the above says: It’s 50-50 as to whether the next intermediate move is up or down. My vote remains: 51% for the upside. Notice I said 51%, not 99.99%.
When the indicators are midships, it’s often a good time to begin both long and short pyramid accumulation programs at the same time on that item. For myself, I can’t overemphasize that I don’t want to be adding ANY short positions unless the entire buy program, if completed, sees me holding no more than 30% short, 70% long, and that must remain true while every dollar that IS deployed… from dollar one.
What I’m saying, in simple terms, is that you should not short one dollar of gold unless you already own 3 dollars of gold. If you plan to short 2 dollars of gold, you better own 6 already. Those who violate my rule may get to wear a Smarty Pants Crown for awhile. But, again, picture Sherlock Holmes on the beach. That’s you. Wearing your gold smarty pants hat, while a nuclear armed aircraft carrier, the USS LONG GOLD, steams towards the beach, with you as the primary target.
This is gold bullion. The world’s lowest risk investment. It’s not a one-shot deal penny stock, with 95% odds of being delisted. Focus on the long side of gold, if you are here to make money.
While they shorted gold into the top of 1980, the bankers still carried gold longs all thru the 1980-2000 bear mkt. If THEY did that, why would YOU be naked short NOW, in what is likely the greatest bull mkt of all time… Hello?
I want to come full circle with my story of being long and short at the same time. The difference between winning and losing in the market is largely about handling emotions. When you go for long periods of time with your positions deeply underwater, without a single win, you start to creak like a floor. Over time, you can “break”. Imagine a basketball team that fails to score a single basket, game after game. They can’t even score a basket, let alone win a game.
This is why I talk of seeking weekly and daily victories. I’m 100% sure that many gold investors who liquidated into the 2008 gold stocks meltdown would have held their ground, had their positions been balanced with even a modest percentage of gold short positions, put on into the strength into 1030, and into the huge rallies that occurred on the way down from 1030 to 680.
Do what it takes so you aren’t mentally broken. You want what you see in your account action on a daily basis to be something that makes you feel positive. You shouldn’t have to create a fake or forced positive outlook; the actions you are taking should provide that to you.
If gold falls $35 (it just did over the past couple of days), and you are booking profit on short positions while adding to longs, the positive energy you get from booking profit will make the buys easier, and make it easier to stick with your pre-set sell orders.
Price has a 99.99999% chance of hitting either or your short or long profit booking points. So there’s no need to “jump your profit booking gun”. Sell as planned, not as you feel like it.
Rather than shorting gold, my suggestion is you operate US dollar buy programs, but using no more than 1/3 of the money you have allocated to gold. The benefits are:
A: You are not directly betting against gold, the world’s smallest market.
B: As gold moves up and down, you are booking profits on USD while buying gold.
C: Gold is the world’s smallest financial market, and the USD is the world’s largest financial market. Gold has quadrupled against the US dollar. Gold could go up in value many times in value while the US dollar cannot fall below zero.
Shorting the USD in a gold bull mkt is a waste of time. Gold is leveraged to the USD. And you can’t get a margin call! I bet you make more money being long both USD and gold. AS the gold bull matures, the 70-30 ratio still applies. But the USD is the one wearing the big 70% hat at the end of the gold bull mkt. It’s a slow transition, not an event. Today is not the day to go hog wild long on USD. But if you own zero USD, consider adding a professional USD currency buy program.
I’ve dismantled a lot of myths in the gold community. Such as the idea that if you can physically enter a stoploss in your account… that automatically makes you a professional investor. WRONG.
Consider the concept that building and managing a small gold short position or modest USD long position, preferably the former…. can actually help you make more money in gold over the course of the bull mkt!
I want to finish today’s piece with a closer look at the gold daily chart. Here you can clearly see the symmetrical triangle. This like a magnified view of the weekly chart. Currently there is a tiny head and shoulders on gold. I’ve highlighted that with the blue circles.
The trigger levels for a breakout on the massive weekly chart head and shoulders are: A move over the thin red neckline of the small current h&s on the daily chart. Then a move over the thicker red supply line which is the symmetrical triangle supply line.
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