Trading Techniques  |  BON 2009

Profits, Pitfalls, Patience by Donald W. Pendergast Jr.

Profits, Pitfalls, Patience by Donald W. Pendergast Jr. Plan your trade, trade your plan. Here’s what can happen when a trader plunges into a position without following a trading blueprint. God really watches over children and fools, then I must have been among that special group of foolish, childlike traders who were “miraculously” bailed out of trades that tragically went wrong. Here’s what happened when a fundamentally sound, long-term position trade gathered steam, peaked, and then crashed before finally recovering, eventually regaining most of the profits, despite taking twice as long as planned to realize them. THE TRADE SETUP OF A LIFETIME In autumn 2001, I received an advertisement that extolled the value of silver, a commodity that was languishing in the cellar of a 20-year-old bear market, but which was now also giving evidence that a major bottom had formed (Figure 1). At $4.50 an ounce, it was hard to reconcile the advertisement’s ultrabullish prognostications with the dirt-cheap asking price for the beaten-down commodity. I thought nothing more about it until May 2003. At that point, after making the dead low in November 2001, silver had already begun to trace out a series of higher highs and higher lows and was trading at $4.80. Once again, I received the same ultrabullish sales pitch to buy silver. After doing some research, I decided that the downside risk of approximately $1 an ounce was well within my risk tolerance. The global supply/demand situation for the metal was bullish, and the world was on the verge of a new commodity bull market. Of course, the ad copy’s suggestion that silver could eventually top $50 put a potent dose of confidence behind my decision to buy. SCALING IN I began to accumulate silver in early July 2003 (Figure 2), paying $4.89 for my initial position of real metal (no futures contracts were used in this trade). Since I decided to scale in as price moved (hopefully) higher, I waited for a few months, jumping in again in early November at about $5.28 an ounce. I still held a mental stop at $4, just in case there was some unexpected turbulence. By then the series of higher highs/higher lows was well established, and my heart raced in anticipation of a sudden surge in price.

by Donald W. Pendergast, Jr.