Yesterday I posted my views about a possible scenario that could materialize with the US-Dollar. The point here is not to make predictions but to be mentally prepared and open for all possible outcomes. It is always a good idea to think about developments that could hurt most traders. If you want to prosper in the long run you need to think about the worst case scenarios beforehand.
I went to cash at the end of October. One of the reasons why I decided to step aside was to recharge my batteries and to relax. There are many other reasons that prompted me to go to cash. The main reason though has to do with what I expect 2010 to develop into. Market volatility during the last 2 years has been breathtaking. This year’s percentage gains have been extraordinary. After these kind of movements markets like to regroup and take a breather. Technically speaking that means we are likely to see much less volatility going forward. Odds are high we are going to experience range bound markets in the near future. Then the markets will show their hand. The biggest threat for traders during trading ranges is ‘overtrading‘. Churning one’s account is dangerous. The danger is two-fold as churning capital automatically means churning mental capital.
An important truth for traders is that when you are in cash you are much more objective in your analysis. Even if you are a seasoned trader, the moment you put on a position you are biased. Looking at the charts, now that I have been in cash for about 2 months, I am even more convinced the easy money is gone for now. The markets have put in strong trending moves most market participants didn’t expect. Technically speaking we are dealing with very strong markets. They will need to digest the high volatility and the strong advances. A crash is possible but not likely. As a general rule markets need time to build tops and lower highs before significant crashes occur.
My strategy for the near future will remain the same. I like buying strong resource stocks preferably trading near their respective all time highs. At some point in time gold will show its hand. Either the December 2009 high will mark a top in gold or gold will resume its uptrend and move to new highs. I recently wrote about likely future gold price scenarios. In my opinion the best protection is to buy the strongest resource stocks in that sector. They have the potential to move up significantly even if gold just moves sideways and doesn’t explode to the upside.
Conclusion:
I expect the market’s personality to change and I don’t expect strong overall trending markets like in 2009. Trading in 2010 will most likely be more difficult than in 2009. Patience and risk management will be key.
Be patient with your winners, be very impatient with your losers.
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