Managing a winning position

So far, my shorting strategy for silver (see 1/3 post: PM Correction Imminent) has been playing out as expected..quite handsomely indeed. But big short-term unrealized gains are not at all comforting – no sooner had you become comfortable with big unrealized gains than you bled most of those gains. One mistake I’ve frequently made over the years is mismanaging a winning position.

I established my core position (the “Core Position“) when I doubled my shorts last week on the back of a sharp counter-rally (see 1/12 post: Shorting More Silver). I intend to maintain the Core Position for the medium-term, which is my main time frame. The new stop for the Core Position is $28 (plus some); it’s a bit tight, but I want to lock in most of my gains. $28 had been a strong support level for the past few months, and I expect it to be an equally strong resistance level for the medium-term.

Yesterday morning, as a sharp sell-off began to materialize following a failed short squeeze (see 1/18 post: Taking a Stand), I doubled my shorts again at $28.2 (total ramp-up: 400%). As part of my effort to better manage the Core Position, I intend to trade such new shorts (the “Spec Position“) on a much shorter time frame. Short-term trading of the Spec Position will allow me to take on intraday risk whenever I anticipate a big move (like yesterday, and possibly a counteraction today); if I’m right, I would enhance my returns, and if I’m wrong, I would suffer a short-term loss on the Spec Position but it wouldn’t deter my focus/confidence on the more long-term Core Position. This should address my prior problems of ramping up my position too much, too fast – a quick way to lose focus/confidence and a lot of gains.

Yesterday’s session provided a great opportunity to implement my new strategy, and I covered the Spec Position at $27.2 (total return on just the Spec Position: 67%). Silver had a big down day, and one of two things may occur in the short-term: (i) re-test $28 (many shorts likely piled in with tight stops) or (ii) free-fall below $27. Considering that silver has sold off almost 7% in just two sessions, I expect a small rebound to re-test $28. To protect more gains, I decided to shed half the Core Position this morning, also at $27.2; the size of this effectively long Spec Position is 50% of the Core Position. I intend to re-establish the Core Position to its initial size once silver re-tests $28 or breaks below $27.

[Silver COMEX MAR'11: 1-month]

In the past, I would have completely flipped to longs (as opposed to fading the Core Position) based on the reasoning that: if you’re so confident about market direction to fade your position, why not just flip it? This is nice and dandy if you’re right, but if you’re wrong it’s very easy to lose focus/confidence on the longer term strategy. But I’ve tossed the scalper’s mentality out the window, and now my new strategy establishes a core position for the long-term that is ramped up or down by a spec position in the short-term to either enhance or hedge the returns. Of course, the key is to have made a solid initial trade to kick off the new system :)