How to squeeze more juice from your gold trade

published 22 July 2011

Here's something I've learned in my twenty-odd years of trading: some of the best trades you can make are also the hardest to make.

It's true. And the flip side to that is that the bad trades are a hell of a lot easier to place.

Running your winners and cutting your losers is certainly easier said than done. Instinct reels against selling losers to crystallise a loss when that's exactly what you should do.

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And cashing in profits always gives you a nice warm glow inside so you risk missing out on a bigger move higher in a quality stock.

We need to fight these instincts. Doing so can make us better traders and give us a chance to make bigger profits.

Today I want to add a nuance to the strategy of running your winners that'll help you stay on track. When I tell you what I'm thinking, you'll see it's a hard trade to make. But I reckon it will be worth it.

Here's what I'm suggesting.

Add to your winners when they're losing

To understand this idea, think about how markets move. They don't move straight up, do they? They zig and they zag up a little, down a little, up a bit more.

Even the very best trades don't rise in a straight line. There are nearly always pullbacks. And buying on the pullback can be a great way to sneak some extra profits from your winners.

Let's look at gold, as it's one of our favourite trades right now. Gold is a classic example of what I mean. It's been a great trade but as I'll show you, it could have been a lot better.

With gold, I haven't just been recommending that you run your winning positions I've been urging you to keep adding to them. Every time gold ticks up $100, I say buy another tranche. Keep building up has been our strategy.

Sure,it's a risky strategy. But if you want to make a lot of money you have to accept the risks.

I don't need to show you a gold chart to tell you my strategyhas worked beautifully. It's been a real success so far.

Yet, though the strategy has worked, I know I could have made even more cash.

If I'd bought gold on the pullbacks, my profits would be even higher.

Here's how I think we can make our gold trade better

Gold tends to fly, and then dips back down. I've been looking at the patterns quite closely lately. And from what I can see, gold seems to retrace at least a third of any new leap. Wouldn't it be lovely to buy on that dip?

Why pay the new high, when you can wait and pick it up as it falls back down to earth?

And when I look back on my entry points, I reckon I could have saved myself a fair few quid by buying in on the pullbacks.

I've been buying gold each time it moves up $100. Starting with a buy at $1,230, I bought at $1,330, $1,430 and recently at $1,530.

And as I write, $1,630 doesn't look far off. The $1,600 level has already been tested but then gold pulled back to the current $1,590. If gold punches back through $1,600 and ends above it on a weekly close, it could easily move to my next buy target at $1,630.

But, if instead of buying when gold hits my targets, what if I wait for the pullback? If I wait for gold to hit $1,630 and then assume it'll pull back to $1,600, I could save myself about 2% on the trade. And that's got to be worth having!

Looking back I can see that this strategy would have worked very well.

Of course, there's a risk here. If gold does hit $1,630, it may never pullback to $1,600. I may miss the boat completely.

But I'm going to give the strategy a go anyway. If history is anything to go by, I'm still likely to get in on the trade, and I'll get a 2% discount on my latest tranche.

To be honest, it's a hard trade for me to do. I'd much sooner pay my money down and buy at $1,630. At least then I know I'm in.

Yet there's a rumbling feeling in my tummy. I think it's the fact that the trade feels wrong that tells me it's the right thing to do! The best trades are always the hardest to make.

Trading is a contrary affair. Let's wait and see how this one pans out.

This article is taken from the free investment email The Right Side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.