Silver: There Is A Classic Trade Setting Up In The iShares Silver ETF (PSLV, SLV, AGQ, ZSL, DBS)

Scott Pluschau:  There is a classic trade set up in the iShares Silver exchange traded fund (NYSE:SLV). 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, which is approximately halfway inside the prior consolidation area, and target the highs of $48. See chart.

7-20-2011_10-35-42_AM_pluschau_chart_slv

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 four to one 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 ten percent 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.

Related ETFs: Sprott Physical Silver Trust (NYSE:PSLV), ProShares Ultra Silver (NYSE:AGQ), PowerShares DB Silver (NYSE:DBS), ProShares UltraShort Silver (NYSE:ZSL), iShares Silver Trust (NYSE:SLV).

In full disclosure I am long 2014 Silver futures since $18.25.

Comments are welcome at [email protected]

Written By Scott Pluschau From ETF Digest  

Scott was a financial advisor with Citi. His technical analysis report was recently featured by Dr. Marc Faber on the Nasdaq Composite Index in his June 1, 2011 Gloom Boom & Doom report. Scott earned his degree in Accounting and Taxation from Pace University. He lives in Long Island with his wife Ilona, daughter Olivia and new baby Henry.

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds. ETF Digest was founded in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.  Even if you’re not a fan of chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.

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