Processing Losses and Gold signal 7/27/13

Developing a strategy to overcome how to mentally deal with losses in trading is a key to being a successful trader/investor. We learn more from losing than winning, which is an unfortunate reality. In trading there is no such thing as certainty. I remember a PhD wealth manager, a gold bug, coming to our local AAII (American Association of Individual Investors) meetings and proudly claiming his wins in gold as he bought at $900 and it rose to $1200. Then he came back next year and repeated his happy performance when gold was up to $1600. He could do no wrong. He was a winner. He preached gold would hit $2200 because all the gold in the world would only fill a swimming pool. Next time he came, he was quite subdued. Markets had risen but gold had dropped to $1400. He had missed opportunities and he looked sick. He was buying gold miners then. Of course with gold much lower, I can imagine him now fighting to just hold on to his job. I expect we will not see him in a while at our meetings, unless he can process his losses. How can he do that?

Losses in the stock market make us feel like a loser. Missed opportunities also are treated as “losses” by traders.. I had a huge missed opportunity “loss” this year, and it still hurts. I listened to LW’s market forecast and ignored my own charts and systems.  LW would have been perfect if I had just turned his forecast upside down. Oh I get so mad with myself when I look at my trading systems signaling Up and I plan on Down, because LW said so. It was a huge missed opportunity that I treated as a ‘loss”. By focusing on what I learned from it, I was slowly able to overcome the feeling of being a loser and gain my confidence back. I have promised myself that I will no longer listen to Gurus who forecast long term direction. There are plenty of them around. I will only listen to the tunes my charts play and follow them.

My charts cannot predict how long any direction will last. For example a down signal can be short lived and turn right back into an up signal. Had I just stayed in it and ignored my down signal, I would do better. But then if I am longer following all my signals, what would dictate my buying and selling rule? I accept these small “losses” as part of the reality that the markets are not predicable. I don’t believe anyone who tries to tell you they can predict long term market direction as they are simply deranged. What I do know is a down signal is a sign of weakness, and I prefer to exit and not challenge that weakness, as the fall could be very substantial.

Looking at gold now, I see that it has taken a HUGE fall from its highs. It is now perking up although I do not expect it to start climbing for the stars. Investors who left and got out of gold have memory and it is likely that gold will try to build back a base before it climbs. This creates an opportunity. If I buy GLD on dips with a tight controlled loss, I could still profit. See chart of GLD below.  As long as it stays above my “floor” line of support, I will wait for a dip and get in. My sell point will be the support line. Profit will be taken on rises and signals from stochastics signaling overbought conditions. My expectation is sideways with a chance to make money on dips. If that is wrong, I will accept that as part of the frailties of trying to predict the market. Process a loss by asking what did we learn from the trade. Did we follow the trading plan? If so, then accept the loss as part of trading. Long term we will be winners, assuming we are using a good trading system.