© peterschreiber.media / Shutterstock.comFor investors, the considerations are physical gold and silver, mining stocks, and exchange-traded funds (ETFs), and all of these have performed well so far. But how about those who want staggering, life-changing gains that can be possible in a historic bull market? Yes, I’m talking about speculators and traders. The gains can be great, and as long as you understand (with discipline) how to deal with the volatility and risk for loss, you’ll be good to go.
Focus on some “golden rules” (the tips in this article) to enhance your chances of success. Although these tips are being applied to the world of gold and silver, many of these can serve as guidelines with other assets and investment vehicles in the world of speculating and trading.
Focus on a specialty
Even though some aspects of trading tend to be in a variety of venues (such as technical and fundamental analysis), develop expertise and knowledge in a specific market or asset versus being a “jack (or jill) of all trades.”Here, the focus is obviously gold and/or silver. Focus is important because your success will be a laser, not a shotgun. Get intimately familiar with an asset, specific market, or investment vehicle. Find out “how it ticks” and what drives it both up and down. This focus is part of the foundational success leading to your financial rewards.
Do research and more research
Once you choose what you’ll focus on, get all the information you can about it. Get the data. Find out what the experts are saying in that specific category. What are the popular industry blogs reporting with news and views? What are company CEOs and fund managers saying? How about market statistics? What is going on with demand and supply? Are there market drivers or other factors that can influence price in the industry? How about other markets that affect the market you’re in?Be a contrarian
Long, long ago, the billionaire J. Paul Getty was quoted as saying, “Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan. It’s the very essence of successful investing.”During gold and silver’s most recent bear market (2011–2019), both metals were unloved by the general market. No one had a positive remark about either in the mainstream financial media. But the contrarian “looks under the hood” and sees whether the ingredients are there for the next bull market. After all, bull markets start in moments of pessimism and despair. If no one wants this asset or vehicle, that means that prices are very low. It means that demand and supply favor the discerning buyer.
The same point is true when everyone loves a specific asset or vehicle. If everyone wants it, then how much more upside is there really? The contrarian understands that bear markets start at the height of jubilation and optimism. Markets get overbought and conditions then favor the discerning seller.
Gold and silver are in a major bull market. As it gets mature and even your neighbor or the Uber driver starts giving you advice on gold and silver, start planning your exit!
Limit your grubstake
Before you get enamored and plan on betting the farm on gold or silver or whatever is being loved in the media, become disciplined about how much you plan on using for your speculative and trading pursuits. Very, very often I have seen how people got burned when they bet too much of their money on a jubilant choice.Limit how much you’ll deploy, and keep in mind that the bulk of your financial assets should be in quality investments, cash (savings accounts), hard assets (your residence), and strategies that give you proven gains, such as paying off debt.
Stagger your entry
A common approach (unfortunately) is that as soon as someone opens his account for the purpose of speculating/trading, he deploys the full amount of the funds immediately. If he started with, say, $10,000 on Monday morning, the entire amount has been used for positions by that afternoon. Then, when opportunities arise the next day or later that week, he has no funds to use.Keep in mind that you can’t foresee every short-term twist and turn. A good approach to consider is to limit your entry point to, say, only 25 percent of your tradable funds. Wait a week or two, and deploy the next 25 percent if you see a buying opportunity. Again, wait a week or two, and deploy another 25 percent. Keep the remaining 25 percent of your funds for buying opportunities that arise.
Use the right speculative vehicles
The “how” in speculating and trading can be just as important as the “what.” This is especially important for the beginner and intermediate traders and speculators.For example, you may be all set to speculate with futures (the “what”), but if you don’t know how dangerous they can be, then I suggest call and put options on futures (the “how”). Futures can be very volatile and risky, and you can possibly have a greater loss than the amount you used; therefore, limit your risk by using options.
What’s that? You want to speculate on gold and silver by getting in call and put options on, say, gold and/or silver ETFs (the “what”)? Sure, but beginners (and beginning-intermediates) should use long-dated options. Many folks use options that typically expire in nine months or less. I prefer (especially for beginners) options such as LEAPs (long-term equity anticipation options), which is the “how.”
Why? LEAPs typically expire in a year or longer, frequently much longer. As of August 2020, call and put options on many gold- and silver-related vehicles such as stocks and ETFs expire in June 2022. That is nearly two years of time value — cool!
All things being equal, buying an option expiring in, say, two years, is much less risky than an option expiring in three or six or nine months. But I bet you knew that.
Have multiple positions
When possible, have multiple positions on so that you have flexibility given market conditions, both current and expected. If, for example, you’re bullish on gold, and the call option you bought on it is profitable, you’ll be asking yourself, “Gee, should I hold on or sell it?” Of course, there may be other factors at play, such as whether you need the money, see other opportunities, and so forth.If you’re bullish on gold, and if you have the cash, then consider multiple positions such as two or more call options (for example). That way you’re not in an “all or nothing” position. You have more flexibility. You can sell a portion of your position so you can have some cash “on the sidelines” that’s ready for deployment on new opportunities.
Of course, don’t go ape and have 100 options on. But be diversified and have some cash on the side if possible so that you can take advantage of opportunities when the market ebbs and flows.
Use technical indicators
When you’re investing (investing, not trading or speculating), you could probably do fundamental analysis all by itself and do very well because real investing is a long-term pursuit (measured in years and maybe decades). Some speculating can indeed be long term, but most speculating is short term (typically measured in months). Trading is almost exclusively short term (measured in days or weeks — and sometimes hours!).Given that, serious short-term speculators and experienced traders will generally rely on technical analysis. Moving averages, charts, and volume data become very important. I personally don’t trade that much, but I’ve done plenty of short-term and long-term speculating so I take seriously data that helps see “oversold” and “overbought” conditions such as the relative strength index (RSI).
Do some hedging
When you see that your positions are doing extremely well, consider hedging. Hedging is basically a bet against your primary position or expectations; it’s essentially a form of insurance if the market unexpectedly turns against you. Keep in mind that markets turning against you are typically unexpected turns!Say that you have 20 call options you purchased recently on silver, for example, and that currently they are very profitable. Silver was on a tear and at the moment you’re not sure whether it will continue or correct (pulling back or declining temporarily but still in a long-term bull market). Experienced folks start to hedge, even if only on a limited basis. Perhaps they’ll write some covered calls or buy some short-term protective puts. Learn about hedging to protect positions.
Take a profit
When you’re investing, time is on your side, which is why “long term” is a vital component. Well-chosen investments (stocks, ETFs, mutual funds, and hard assets) will zigzag upward over time. Time helps you make money.But shorter-term vehicles such as futures and options have a limited shelf life. Futures and options can be great for speculative wealth building, but they’re no good at all for preserving that wealth. Given that, don’t be hesitant with profit-taking to some extent.
If, for example, you have a profitable call option on silver futures and it’s deep in the money (ITM) and expiring in the near future, cash it in ASAP. Take the profit before it declines significantly or evaporates outright. Fortunes can change rapidly with your futures and options positions, so take profits knowing that you can always add other positions just as readily.
Use brokerage orders
I’m adding an 11th item. Please utilize the various types of orders that are available with your brokerage account. I use limit orders, stop-loss orders, and trailing stops regularly in both my investing and (especially) in my speculating. These orders are very powerful and useful tools that can help you optimize gains and minimize losses.