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A Guide For The Advent Of Gold Rally 2016 | Part I: Mindset

|Includes: GLD, GLDI, Aberdn Std Gold Shs (SGOL), SLV

On Futility of Partial Trade Plan

Nobody wants to waste time. Nobody has to but when it comes to planning a trade, most people inadvertently do.

Before a fund is placed in any market where it could earn or disappear, one needs to make an assessment and eventually come up with answers to the following loaded questions: What is the probable direction of the market; what is the ideal entry price; and what are the exit points for profit and loss. Of these three, majority of market players are much more consumed by getting the probable direction of the market that gives an idea whether to buy or to sell. Listen to TV features, read business broad sheets, check your email newsletters, talk to people in the subways of Wall Street, or you ask your broker. Some talk about signals while others share the latest economic news. Observe how almost 90% of the discussion allows you to decide whether to buy or sell but nothing suggests when to do that exactly. We can assume they mean "now" but in trading, "now" is vague. While not all, some still share their ideal price for entering the market and gives a reasonable stop loss and a target price. Nonetheless, if you don't do your own analysis, your source of investment decisions is the media that mostly talks about the market sentiment.

More doesn't mean thorough. With more but redundant effort exhausted in deciding whether to buy or sell, it is difficult to be confident with any trade execution. Partial assessment of entry and exit prices brings doubt leading to fear that the buying price may be too high or the selling price is too low at the moment. That could scare anyone. Your support and resistance levels for exiting the market are all strangers to you. It is common for some portfolio managers who do their own analysis to be obsessed with making the right call to either buy or sell without making a strong argument for entry and exit. A narrowed insight gets a participant lost in the market. Those who never use stop loss in their trades are victims of this mania. They mostly care about being right on their decision to buy or sell. They see the market for the most part as either head or tail. Regardless of the level of experience, amateurs and professionals in the field share the same tendency to create faulty execution by focusing mostly on the two sides of market. People may have mistaken intraday trading with investment. There is no question about the importance of having a grasp of the market sentiment but remember that a trade plan needs three results from the pre-trade analysis. Trades need a clear execution path to complement the probable direction.

Spending most of the time and effort for 33% of what is basically required is not wise. It's wasting time.

Gold Market and the Media

July 2016, financial media has been flooded by bullish case for the gold market since a couple of months after hitting the low of $1046 per ounce in December. It gets more difficult to ignore the hints that the gold market is poised for another strong rally. The price action suggests a possibility of getting an upward leg similar to what the market had in its post-crisis surge from 2008 to 2011. Many analysts noticed the convincing rejection of support levels as the price has gone up with steep trajectory. So maybe the price will really go up higher and revisit the once-a-support level of 1520. There is no guarantee but a substantial amount of articles can compel anyone to subdue the will to the will of the bullish media.

While there is seemingly a consensus of bullish sentiment in gold, investors and traders will make different setups to take advantage of such opportunity. There is never a consensus when it comes to trade strategy and risk management. That explains why along the way, while everyone is for buying any form of gold, be it ETF or physical or leveraged CFD, a buyer may lose while another buyer will profit. For those who are already long on gold, should they lighten their position or hold it or add more long? For those who have been standing aside, should they get in now or wait for a retracement? How about those who shorted gold? Is it time to cut their losses or hold on and wait for a breather? Gold maintains its reputation of being dependent on its perceived value most of the time. Some may contend that variables such as demand and supply only come in second. Regardless, people need a reliable set up that could lead to gains or a set up that safeguards their capital when they're wrong.

The market in the first month of 2016-2H tries to establish the second cog for the bullish argument for the yellow metal. The market sure looks capable of completing another bullish structure in the monthly chart. Expect more blogs and reports to come supporting the claim of gold bulls. From here on, you may see how futile most of these articles are in the face of a beast called the gold market. They will assess the aftermath of Brexit. They will link political tensions to the gold price action. They will account gold acquisition by central banks. You take all these information in, which you think is the right amount, and get ready to place your position only to end up in a void. Without the assessment of multiple execution paths for every perceivable scenario, it would be difficult to trust the trade, the action you took. Traders tend to be nervous upon entering the market. They tend to exit too soon. They ignore the importance of stop loss because they don't trust their judgment at all. This could be the reason why amateurs decide to be scalpers and decide not to follow an exit strategy. Stay long enough in this business and you will see how common this situation is. You might even see yourself in them.

Bottom Line

In a serious and at many times a dreadful activity like trading, one needs a healthy level of skepticism towards a sea of information and even towards every word in this write up. Planning for a trade is beyond being selective on knowledge acquisition though. A thorough trade plan is about alignment with the rudimentary requirement of the discipline.

The general theme of financial media discussing gold is that we're in an advent of a bull run. There remains a few who oppose this contention with arguments about gold's merit as a long term asset. Even so, to say that the gold market shows a curious behavior we can take advantage of is an understatement. Years from now, people might look back in July 2016 and wish that they had gotten in the gold market this month so their capital would have grown ten folds or more. It is interesting and simple but not easy. To move on from the futility of a partial trade plan is a good step in an attempt to truly take advantage of the potential of gold market or any market for that matter.