Counter intuitively probably the worst thing that can occur for a newsletter writer (or blogger) is for them to get a long string of calls right. It’s great for selling subscriptions, but dangerous for subscribers. Why? Because novice investors, and even many experienced traders start believing that person really does have a crystal ball, and they justify that as an excuse to bet too heavily.
I can assure you no one will ever be able to score 100% of their calls (they won’t even come close to 100%). But almost everyone will, from time to time, hit 4 or 5 or even 10 in a row. The problem is that after that 5th or 6th win traders start to believe you know something that no one else does, or that your system is infallible. Then what do they do? They bet the farm on the next trade, and that’s the one where the market decides it’s time for a loser, and the bank repossess the farm.
Folks we live in very unusual times. Almost every market in the world is being manipulated or intervened in to a greater or lesser degree. Ultimately this is going to cause a major catastrophe as we don’t have true price discovery based on supply and demand anymore. But in the meantime we have to trade in this environment without the benefit of knowing in advance when and where the next intervention is going to occur. We can make some educated guesses, and sometimes anticipate which way an intervention is going to push the market (the Fed has our back in the stock market) but timing is going to be tough. Who would have thought at the time that the Fed would rescue stocks 5 weeks ago as they broke support, and started down into an intermediate degree correction? Who could have anticipated that the gold rally out of the daily cycle low would be aborted at $1220 before it could even break the cycle trend line? For that matter who could have foreseen that the normal duration of golds daily cycle would be warped from an 18-28 day cycle, to a 28 to 38 day cycle?
In an environment like this where we never know where the next curveball is going to come from, it’s dangerous to trade large positions, much less leverage. So let me warn traders that when your favorite guru is on a hot streak, that isn’t a call to bet larger and larger. On the contrary the smart thing to do is bet smaller and smaller as the odds are increasing that the next trade is going be a strike rather than a home run.
For me personally, I will probably never trade larger than 1% in the metals sector again until I see gold making higher intermediate highs. The sector is just too erratic and unpredictable to take large positions anymore.