“A long-term trade is just a short-term one which has gone wrong”

Tuesday, 10th November 2009 21:15 - by Riddler

Hello fellow traders. It has been an interesting couple of weeks since my last offering, and is worth summarising before we move onto the main theme. The FTSE100 still hasn’t breached 5300 and the DOW still hasn’t surpassed 11,000 and, until it does, I remain wary of the ‘V-shaped’ recovery in share prices and the real economy. However, each week we continue to get positive data from here and across the water in terms of house prices, retail sales, commodity prices and GDP. Gold has easily surpassed the $1,053 previous highs of March 2008, and continues to consolidate for a move towards $1,200. This in itself suggests a lack of faith in the World Economies’ monetary policy and currency devaluations, but as I have at least four gold miners in my portfolio, I won’t complain too much! The quote which serves as the heading to this Blog entry is one which made me chuckle in 2008 and is one which serves as a reminder to continue to strive to pick the best short-term entry points in any stocks I choose, in order to eliminate the risk of becoming ‘locked’ into a share which drifts into a long term ‘loser’. In my technical lessons, I urge investors to always bear in mind the short-term and medium-term technical indicators, waiting for ‘over-sold’ signals to start ringing, before jumping in with both feet. Of course, we can’t possibly hope to eliminate all downside risks, or pretend to have full control over the direction of shares, but we can use all available technical and fundamental data to base our decisions upon, and accept that most other things are out of our control. I recently bought Templar Minerals (TIDM code: TMP), having bought and sold them during the early summer, and used exactly the same ‘screening’ criteria that I have used with other tips on 'Riddler's Technicals'. Things were looking good. I had waited patiently for three months, lurking in the shadows for an ideal entry point. I bought with confidence, and was soon rewarded by a 30% rise in share price and some helpful tips from a national newspaper. The company then released an RNS, the dreaded “We know of no reason for the share price increase other than the updates in previous releases”, the Market Makers then deciding to use their powers to wipe my paper profits. However, for me, nothing had changed. I had bought for the same reasons that I continue to hold, confident of a healthy return, despite now being 20% down. This leads me to introduce some advice for what to do if your ‘short-term dream’ becomes a ‘long-term headache’: 1. Don’t panic. If you did your research and were happy to buy, then you should be happy to hold, knowing that the drift in the share price is out of your hands and is not a reflection of a weakening of fundamentals. The ‘maker’ and other investors merely got a little too enthusiastic. 2. Don’t top up on the first drops. Wait at least 5-10 days for the dust to settle and the market to get used to the ‘news’. 3. When topping up, try to do so in reference to the 9-18 day RSI and stochastic which will indicate when the ‘fear factor’ is starting to wain. If you do manage to buy more at the bottom, then you will quickly begin to average-out the losses. 4. Don’t forget that while 20% down seems a lot, it is nothing compared to the fact that most stocks are still at 3-5 year lows, even with the rally since March 2009. In other words, you have still bought at very low levels with reference to previous ‘highs’. If the stock has good prospects, then you must sit it out rather than lose faith. 5. Understand that MMs (Market Makers) have a tricky balancing act to do in terms of buys and sells, and they too have a stockpile of your share which they have to ‘manage’. They must ensure that stable liquidity is maintained, which sometimes leads to ‘short-term pain’ for us little guys. With that in mind, I am philosophical about my particular ‘long-term headache’, and in reality it just means that I am not realising short-term paper profits as soon as I have enjoyed with other shares. It doesn’t mean that you or I have backed a ‘loser’.