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First, allow me to express my appreciation to Future Source for asking me to contribute to this issue of "Ask the Expert". Boy would my third grade teacher Mrs. Bownes (not my biggest fan) ever be surprised.
As I reviewed the questions that were submitted I selected those questions that were asked by multiple individuals and that could be best answered in this limited format. If your question was not selected, visit my weblog and ask me at leegaus.com. There are a number of extremely qualified professionals that will address your question(s).
Question One, from Pam in Australia, has to do with the Gold market and my long term outlook.
Pam (and others), Gold has always held a mystical allure going back to ancient times. During the blow off top in 1980 we witnessed all time highs in the Gold market when it exceeded eight hundred dollars an ounce, and advocates like Howard Ruff continued to suggest buying gold. In my view since that time Gold has become a rather uneventful commodity reacting strongly only when there has been a world crisis as we witnessed during the military action in Iraq.
As I examine the commodity markets I see little reason for Gold to become a major present day player. My partner Steve Erdman has a great saying that I believe applies to Gold, "When the pile gets bigger the price gets smaller and when the pile gets smaller the price gets bigger". If one is tempted to enter the Gold market long term hoping for a dramatic bounce keep the following in mind:
1)Gold inventories are near historical highs. Pile bigger or smaller?
2)Mining for gold has only recently slowed down. Pile bigger or smaller?
3)Reuters recently carried a story which indicated that demand for jewelry among society's elite is diminishing. Is the pile getting bigger or smaller?
4)Since the end of the 1990's to present the worldwide demand for gold is down.Is the pile getting bigger or smaller?
Given this information I have a hard time becoming overly friendly to Gold. In my view it will take a world crisis of monumental significance in order to greatly rally the gold market anytime soon.
But that should not be taken to mean that it cannot be effectively traded. When Gold trades in a sideways market, or a market with a gradual ascending or descending bottom (or top) you may be able to find potential opportunities. In fact the sideways type of market has always been my favorite to trade. One does not need a dynamic bull market or a crushing bear market in order to find opportunities. You can follow my recommendations for gold by logging on to my weblog at leegaus.com.
Question Two from Daniel in Michigan (My home State). Daniel wants to discuss how to determine profit objectives.
Daniel (and others), this is an extremely valid question. It has been my experience over the last thirty years of being involved in this industry that the only aspect more difficult than picking winning trades is how to determine when to take profits and get out. The reason for this is pretty simple; it is greed. If there is one thing traders seem to dread more than a losing trade, it is when they liquidate a winning trade one iota early. So in turn they hang on too long and then gradually watch the profits erode hoping that
the market will rebound back the previous highs (lots of luck). In selecting profit objectives for potential trades the trader in my view has to do answer a couple questions first.
1)Is it a short-term trade? Minute by minute? Hourly? Day trade?
2) Is it a long term trade?
3) What method did you use to initiate the trade?
4) What is your capitalization?
Capitalization is a definition as to the level of risk, both in term of monies and time a trader is willing (able) to take. The more adequately capitalized a trader is, the higher that trader can aim in setting objectives. It is my opinion as expressed in my booklet "Doing it My Way" that being undercapitalized is a major reason for traders losing money.
In selecting the trade, did you use technical analysis or fundamental analysis? If you used technical analysis which I believe is most common in shorter term trades, then selecting exit points by using traditional support resistance values is appropriate. There are times when I will use mathematical formulas to determine exit points. In doing so I believe one should have some handle on the underlying fundamentals to determine if the mathematical model is reasonable.
If the trade is of longer term by design the trader needs to be more aggressive in the initial goals for the trade. I believe (just personal opinion) that longer term trades need to hold the potential of a 3-1 initial risk reward ratio. If the trade is shorter in duration the initial profit loss ratio is going get closer to 1-1. I say initial because things change and a trader must be flexible enough to adjust to changing markets. Longer-term traders can use and do use technical analysis in trading the markets, but I recommend they also have a handle on the underlying fundamentals.
With all this in mind, here are my methods:
1)For long term traders with a handle on fundamentals, I use old highs or lows asguideposts.
2)For short-term trades I use near term support and resistance levels as guideposts.
Be mindful that as a trader you will more than likely experience losing trades. You will probably get stopped out for a loss at times only to watch the market turn around and go your way, and you are not along for the ride. You will exit markets with a profit only to see the market continue to go your way, and again you are not along for the ride. If you indeed experience any of these situations, remember DO NOT LOOK BACK. Plan your work and work your plan and don't get caught up in second-guessing, it can be fatal.
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