Today, we're going to share a timeless piece of trading wisdom that will help anyone make a lifetime of low-risk, high-reward trades...
The piece of wisdom is: To consistently win in the market, the trader must be a "connoisseur of extremes."
An extreme is when the majority of market participants are betting heavily on one side of the market. It's just like overstretching a rubber band: When it's stretched past the limit, it snaps back... and prices move at super-speed. (Read our educational interview about becoming a connoisseur of extremes right here.)
Right now, we have an extreme in silver...
Extremes can occur in an asset's fundamentals (valuation)... They can occur in an asset's technicals (price and trading volume)... And they can occur in market sentiment toward an asset (pessimism versus optimism).
A simple way to judge sentiment is with the "commitment of traders" (or COT) report. It's a government report that classifies market participants and tracks their positions. When these positions reach an extreme level of bullishness or bearishness, it can signal an impending market reversal.
Take a look at the chart below. It shows the last three years of trading in silver (the black line) and the silver positions held by speculative trading funds (the blue line).
As you can see, the blue line recently hit an extreme low. Speculative trading funds have rarely been this down on silver in the last 20 years.
Our go-to expert on sentiment analysis is Jason Goepfert, who runs the excellent SentimenTrader website. He notes, "When [the COT] measures reach this kind of extreme in commodities, it's usually good for at least a 1-3 month jump..."
That's exactly what happened to silver in late 2011: a 36% rise in two months. It happened again in summer 2012: a 33%, three-month rise. And again in summer 2013: a 32%, two-month rise.
Of course, silver is one of the world's most volatile assets. And this "extreme" downward move in silver could get more extreme.
But right now, silver is sitting just 8% above its two-year low. With a stop loss there and an upside of 30%-plus, it's a low-risk, high-reward trade.
And that's what you find when you become a connoisseur of extremes.