Do more of what's working and less of what's not.
This is our "slogan" at Penny Trends, the new trading service we've recently launched.
This mantra guides every action we take. We don't try to outguess the market. We don't make predictions. We simply analyze trends, take our positions in a corresponding micro cap "penny" stock, and keep our slogan in mind.
"Do more of what's working and less of what's not" is another way to say "Let your winners ride and cut your losers short." If a position shows us a profit – if it is "working" – we keep it. We ride the trend for the biggest gains possible. If the position shows us a loss – if it is "not working" – we ruthlessly cut it and move on.
This is the golden path to trading profits. It's the philosophy that will allow you to make a huge amount of money even if just one-third of your trades profit. Say you buy three stocks. Two are losers, and you cut the losses at 15% each. One is a winner, which you ride to a 200% gain. You'd come out 57% ahead by following the golden path.
So what's working this week? Where are the biggest trends? To determine what's working, we monitor a list of 86 exchange-traded funds (ETFs). They represent every major country, sector, currency, and commodity in the world.
Right now, we think the trend in gold stocks is the most important trend in the world.
To track the action in gold stocks, we monitor the Market Vectors Gold Miners ETF (NYSE: GDX). This investment fund holds a basket of the world's largest gold miners. As you can see from the chart below, this fund suffered a huge selloff in late 2008. Gold miners are considered risky assets, and investors dumped risky assets when the credit crunch hit.
But notice how gold stocks have staged a huge rebound since November. They're busy setting a series of "higher highs and lower lows." This is classic bull-market action.
The U.S. government's reckless "borrow, tax, and spend" policy is driving this bull market. Washington D.C. is now running up deficits never seen before in this country. This will eventually cause our currency to be devalued. The U.S. isn't alone. Nearly every government in the world is running up ridiculous deficits in their efforts to bail out every single citizen.
When investors get worried about currency debasement, they flock to gold. Gold is real money that cannot be created by the whim of a bureaucrat. Gold is up $100 an ounce since April, and at $980 is close to breaking the psychologically important $1,000 an ounce level. Gold stocks, of course, are following suit.
We are not in the prediction business at Penny Trends, but we do know that gold stocks are one of the most explosive asset classes in the world. If the U.S. government's "funny money" printing efforts continue to undermine the dollar, gold will soar and gold stocks will shoot to the moon.
We made a play for this trend this week in Penny Trends, and we think you should consider adding gold stocks to your portfolio too.
If we're right, we'll ride this trend as far as the market lets us. If we're wrong, we limit our downside with a trailing stop loss. We'll sell out and move on to the next big trend.