Exactly What I Want to See in a Trade, Part l

Editor's note: It's the question on everyone's mind...

What do our top analysts look for in a trade?

This weekend, True Wealth Systems editor Steve Sjuggerud answers that question. In today's Masters Series essay – originally published in early October in our free DailyWealth e-letter – Steve explains the process he personally uses to size up a trade...

Exactly What I Want to See in a Trade, Part l
By Steve Sjuggerud, editor, True Wealth Systems

"What do you look for in a trade?"

It was one of the questions people asked me the most at our Stansberry Conference in Las Vegas.

This question came in all kinds of variations...

• "How do you define an uptrend?"
• "How do you define sentiment?"
• "When is it getting late in the trade?"

So today, I thought I'd briefly run through my thinking by using an example...

I will tell you what our example is later. But for now, it's easier if you start by looking at it objectively.

Let's look at this investment... What do you see?

I see a multiyear downtrend that accelerated in 2014-2015 and finally ended in late 2015. The price fell from around $25 to around $11.

Since then, we've had a strong uptrend – this investment has doubled from its bottom in a little more than a year.

The downtrend was clear, and the current uptrend is clear. (There are plenty of complicated ways you can define uptrends... But I urge you not to worry about that so much. Eyeballing it is actually good enough for our purposes. The important thing is that you want the uptrend to show that the market is confirming your "thesis" about this investment.)

So we have an uptrend... but what now?

This investment has roughly doubled in a year... Is it time to worry?

Let's find out...

First, I check the sentiment on that investment...

I want to see if investors are overly excited about this investment. The reason why I check is simple: There's typically not much room for upside potential if investors are overly excited and everyone is already in the trade.

If investors are overly excited, I either stay away or seriously tighten my trailing stops.

So how do I check the sentiment? Sentiment is challenging to put into numbers. In this case, the investment is a commodity, so I start with my two favorite indicators for commodity sentiment... the Commitment of Traders report and SentimenTrader's "Optix" sentiment gauge.

Bingo! In both cases, we're sitting at either all-time highs or decade highs in investor optimism.

Based on these two numbers, I don't need to go any further. I know what I need to know.

I will avoid this investment, even though it's in a strong uptrend. Why?

Because the downside risk is greater than the upside potential at this point.

Here is this investment (on top) versus the Commitment of Traders (on the bottom). What do you see?

Here's what I see...

Traders are overly "committed" to this investment right now – to a record degree. "There's nobody left to buy," as they say. And when there's nobody left to buy, the downside risk is great.

Without even knowing what this investment is, I can tell you two things:

1. It's in an uptrend, and
2. I would not buy it because it's at a sentiment extreme.

Would I bet against it? No... not yet. I don't want to fight the uptrend.

If you were wondering what commodity we're looking at, it's sugar.

That's how I'd size up the trading opportunity in sugar right now.

If you wanted to know how I quickly size up a trade, that's it... That's my starting thought process.

You can make it a lot more complicated than that, but to me, that's a waste of time. Within two minutes, I knew everything I needed to know – which is that I'm not interested in digging deeper into buying sugar at this point and my time would be better spent finding a different trade setup.

Good investing,

Steve

Editor's note: Steve has used this straightforward approach to lead his True Wealth Systems subscribers to huge gains over the years... like 324% in health care... 184% in biotech... and 123% on Wells Fargo, to name a few.

Earlier this week, Steve put together a brand-new presentation explaining how a little-known system called the "Nordic Cross" can help you make huge returns in the market. It sounds crazy... but Steve says this is "way more effective than any other investing approach I've ever seen." Get the details here.