Learning from a Gold Stock Trade

A couple of weeks ago a trade was made with a long-term outlook in the gold sector. The thinking was that the trendline had been tested four times and held each time. It ended up being a perfect entry in the stocks AUY, AEM, MDG, and GLG. The XAU charged higher for five straight days. On the fourth day, it technically broke out of a base, and was acting well. A stop had still not been formally set. On the fifth day, each of the gold stocks put in a topping candlestick. No stock was sold, and I decided to let them make pivot lows, which would then become stops after the stocks bounced. You can see by the chart below that the pivots have still not been set. The nice gains are now gone after a 100% retracement in the stocks.

The gold stocks I’m in are some of the best. They held up better than the XAU did. 2/3 of the positions in AEM GLG and AUY were sold today though. All of MDG was sold, and stops were placed under the August 18, 2006 lows for the other three. So what lessons can be learned from this swing trade?

If these equities were in break out mode, that doesn’t mean they would go straight up. A stop-loss placed under the prior day’s low for selling 1/3 of each stock should have been played at a minimum.

It’s difficult forecasting long-term (investing). Anything can, and will happen in the stock market. Day trading and swing trading make defining risk easier.  You can factor in many more known variables in the shorter time period. I’m going to focus on those shorter time frames. Stops definitely need to be tightened during each trade. Don’t try and hold everything if a stock is up five days in a row. It pays to jump of the rally train before it derails.