The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Scott Pluschau
NEW YORK (
) -- There is a classic trade set up in the silver exchange traded fund
iShares Silver Trust
. We had months of consolidation in silver and I have been sitting on the sidelines patiently avoiding random market behavior in this balance area. Two days ago there was a breakout, and now yesterday we had the gap fill and throwback to the prior resistance area, which typically offers strong support.
Buying SLV here at $38 offers a nearly 4-to-1 reward-to-risk ratio if you place your initial stop at $35.50, approximately halfway inside the prior consolidation area, and target the highs of $48.
If SLV gets to $35.50, then I am emphatically wrong on the trade and close it out. Errors, bad luck, and completely unexpected reversals do not hurt me seriously because of position sizing and money management. Perhaps the next breakout will offer another great opportunity afterward should I be stopped out.
I consider the probability of my trade working out as 35% and, with that 4-to-1 reward-to-risk ratio, I have an edge. I am looking to buy SLV at the open today, and I will be looking to add to the position when SLV gets above that high from Monday as overanxious short sellers will be getting squeezed.
This is really as simple as it gets. But discipline is the key to following through on a trade plan. The hardest part of trading is not the buying, but the waiting and the exit. The temptation will be to take a profit if silver is at $42 and you are sitting with a 10% gain. But being successful in the long run has nothing to do with taking nice profits. Success has everything to do with what your initial risk was taken compared to that reward on every trade. You can have an excellent system with more losers than winners provided that the average gain is greater than the average loss.
Although trading is short term, my primary focus is on the long run. It is this type of trade setup that if taken many times will lead to a trading system with positive expectancy.
In full disclosure I am long 2014 silver futures since $18.25.