This is always a difficult question to answer because there are so many variables that must be taken into consideration. For example, at what price point was the position entered into, and is there a gain or a loss on the position. If there is a loss then how much of a loss is there and what is the individual investor’s tolerance level for such losses. Can the investment or trade be protected with Put protection, or should the investor/trader simply exit the position and take a loss. Obviously, all of these questions must be (and can only be) answered by the individual investor or trader.
If we look at the most recent trading action for the SPDR Gold Trust (GLD) we see that the trade/investment is “broken.” Essentially, it broke when GLD’s price failed to make new highs following its all-time high of $185.85.
When looking at the above chart for GLD, we can see that the all-time high of $185.85 was reached on 9/6/2011. GLD’s price then tumbled 17.035 percent to a low of $154.19 which was reached on 9/26/2011. From there, the price reversed course and reached a high of $175.46 on 11/8/2011, but that high was 5.05 percent lower than the all-time-high of $185.85, which means that GLD failed to make a new higher high during its Bull Run; that was a clear sign that something was wrong with the trade/investment.
Now, if the trader or investor was fortunate enough to have a cost basis on the position lower than the price at which he or she sold, or wishes to sell, their position in GLD, then there would be no problems. However, if the trader or investor was late to the party and the cost basis was higher than the price at which the position could be exited, then a couple of other factors would need to be taken into consideration. First, how significant is the loss. This is the point where investor psychology takes over and most investors begin telling themselves: “I’ll wait for the price to come back and then I’ll get out.” Sadly, however, that time rarely — if ever — arrives for many investors. This is also where one’s tolerance level to pain plays a role. Some investors or traders (traders especially) have no problems with exiting a losing position and moving on the the next opportunity; while others (especially “investors”) just can’t seem to part with the position. Those who posses an “investor’s mentality” usually desire holding on to the position, hoping that it will, eventually, return to a point where they can get out and, at least, “break even.”
The second factor to consider is what strategies are available to salvage the position (i.e. if it is not already too far gone). Oftentimes, traders (and some investors) will use certain Options strategies to hedge their portfolios or individual positions against losses. Others will employ shorting strategies to hedge against losses. For example, if an individual owns shares of Apple (AAPL), or a basket of tech stocks, and the trade or investment takes a turn for the worst, the investor will short the Q’s (QQQ) to counterbalance any losses taken on the tech stocks in her or his portfolio.
For those who may wish to learn more about Options strategies, the Options Industry Council or OIC, is a wonderful source of free information. The OIC is an educational Web portal which offers its services free of charge to those who wish to learn more about Options and Options strategies, and it also offers phone, e-mail and live chat consultations with Options professionals.
The bottom line is this: When it comes to trades, or short, intermediate or long-term investments, market participants need to be cognizant of the various warning signs which may indicate possible trouble ahead, and they need to have a plan in-place for dealing with, both, potential and real losses. Obviously, it would be much better to never incur a loss; but, if a loss is inevitable, then it would certainly be best to do whatever one can do to mitigate such losses.
Finally, for those who may be curious about the yellow highlight I added to the chart, it represents a “Death Cross” which occurs when a shorter term moving average crosses below a longer term moving average (e.g. the 50-Day MA crosses below the 200-Day MA). When accompanied by declining volume, this phenomenon almost always indicates that deeper declines in price will follow.
Notes: Charting data courtesy of StockCharts.com.
Disclosure: I do not own any shares of (GLD).
Disclaimer: The content on this site is provided for general educational and informational purposes only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author and do not necessarily represent the opinions of sponsors or firms affiliated with the author. Any action taken by you as a result of information, analysis, or advertisement provided on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
