Let's begin this month's column with a piece of timeless trading advice, courtesy of Jesse Livermore via Reminiscences of a Stock Operator (1923):
The speculator's chief enemies are always boring from within.
It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope... to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to.
The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.
I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And the conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It's like the track. A man may beat a horse race, but he cannot beat horse racing.
If I knew how to make these statements stronger or more emphatic I certainly would. It does not make any difference what anybody says to the contrary. I know I am right in saying these are incontrovertible statements.
Most people won't understand what Jesse was driving at when he made this statement more than 85 years ago, but if you don't get these concepts clear in your head you'll never have success in trading.
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The next big trade won't be easy to do because it will create both hope and fear within you. It will elicit hope because there's much to gain, fear because the perceived risks are high.
It's not easy to buy a market at a new high price, and this is where the fear comes in. The timid trader won't even consider such a play. And this is exactly what I advocate as the next big trade: Buy gold on the next strong move above $1,000 an ounce.
Gold is in the news now because it just reached a six-month high. It's traded above $1,000 only one time in its history, for a short period in March 2008.
At this point I could discuss the fundamentals of why gold can trade well above $1,000 in coming months, but all I need mention is record deficits, record spending and record money creation.
It was one of Jesse Livermore's core trading philosophies that once a market trades above par, or 100, or what I term a master natural number, such as 1,000, that market seldom fails at that number; rather, it generally continues to trade higher and well above that number.
In my new book The New Commodity Trading Guide: Breakthrough Strategies for Capturing Market Profits I outline a strategy specifically for trading moves like this. The basic theory is once gold trades above $1,000 the next target is somewhat higher; 20 percent higher would be a reasonable movement above a number like this, targeting $1,200 an ounce. This would be a potential profit of $20,000 per 100-ounce futures contract.
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After the strong move above $1,000, if any good the market should remain above $975, so I would risk approximately $25 to $30 per contract, a risk of about $3,000 per contract traded for a profit potential five to seven times the risk.
This may be something to consider if you're willing and able to take the risk--and if you can maintain the hope and overcome the fear.