With the gold & silver stocks down so much today, I just wanted to reiterate my preferred position methodology for any positions in the sector. As has been discussed many times in the past, the mining stocks are amongst the most volatile of all the various sectors that I frequently trade. As mentioned with the HMY & HL posts on Friday, there are two strategies or methodologies that I feel are important to incorporate at this time if one is interested in accumulating a position(s) in the sector: Beta-adjusted position sizing and a scale-in strategy (click on either link for an explanation of these terms).
To give an example of these two strategies, let’s say that a trader’s typical position size is $10,000. In other words, if trading a security with a beta of around 1.0, such as the SPY or XOM, then due to the unusually high volatility in the mining stocks, that trader might consider a “full” position size in these stocks around the $3,000 – $4,000 level. Now when applying the scale-in methodology for establishing that $3-4K position, his or her plan might be to purchase in lots of between $500 – $1000 at a time, over the next few weeks/months, regardless of whether prices start rising immediately after the purchase of the first lot or if prices continue to fall down towards their predetermined stop-loss or “stop accumulating” level.
Using this example, a trader interested in the HMY and/or HL longs posted on Friday would have taken about a $1,000 position (in one or $500 in both due to the sector overlap). As both stocks, along with most other gold stocks, were down nearly 10% today near their lows today, that trader would have been down about $100 on the position. To put it into perspective, that 10% ($100) drop would be comparable to a 1% drop on a typical beta position such as the SPY or XOM ($10,000 x 1% = $100). By utilizing the beta-adjustment and scale-in methodologies to these gold stock trades, the typical “deer in the headlights” syndrome of waking up to a position down 10% from the previous session is all but eliminated, allowing that trader to comfortably add a second lot to their gold or silver stock(s) today whereas the trader who thought that the gold & silver stocks “just couldn’t possibly get any cheaper” since that drop on Friday and took a full position then is now in or approaching panic mode while more concerned with where to cut his or her losses.
I still intend to follow-up with the target(s) and suggested stop levels for the HL & HMY trades but as these trades are based largely off the weekly time frames and a scale-in strategy is being utilized, my preference is to watch the charts for another day or so, possibly until the end of the week in order to make such determinations. As always, make sure to set your stops commensurate with your own unique risk tolerance and trading style, regardless of what suggestions or ideas are shared on RSOTC.com.