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Developing a Silver Market Strategy

June 08
16:51 2011

Silver has become a very popular financial instrument – second to gold – for investors to buy and hold as a “safe,” portfolio-diversifying asset amid economic uncertainty. However, even this “safe” asset has seen its share of violent ups and downs. In fact, during the first five months of 2011, the daily volatility of silver prices ranged between 19% and 71%. This makes it an attractive market to enter with an active trading strategy.

For the sake of building an active trading strategy, let’s assume you will be working with silver futures and options, rather than carting around physical bars of silver. The futures market mechanism will limit your transaction costs while giving you the ability to instantly fill trades in an efficient, regulated marketplace. Whenever you’re trading commodity futures, remember it’s just as easy to go short as it is to go long … and over the long-term, it’s just as easy for the underlying market to go down as for it to go up. In that sense, commodities like silver are different than stocks, for instance, which carry an underlying assumption of creating value over time. And unlike stocks, short selling silver is as cheap and hassle-free as going long. When building your silver trading strategy, consider that you can make just as much money on the way down as you can make on the way up.

The options for building that strategy are as numerous in the silver market as they are in any other. Someone with technical trading knowledge can look at a silver chart and see it’s just a chart. It will have established trends, and you can define its moving averages, stochastics, momentum, and any other technical study which will help you identify buy and sell levels for the contract.

A silver trading strategy could also be built around fundamental analysis of the market: supply trends from mines and central banks, demand trends from industrial users and investors. A silver trader with a fundamental trading strategy should try to anticipate other market participants’ buying and selling before it happens, so your strategy may not only be tied to silver’s own supply and demand, but also to outside economic factors.

As with any trading strategy, the key to your success will likely be your discipline in strictly following the strategy’s rules you lay out, then evaluating whether or not to change the strategy. Know when to place a trade, and also know when to exit the trade in a disciplined fashion.

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Today’s Day Trader Strategy

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