“Oh my gosh, silver is down 10%! What do we do?… Silver Wheaton is down even more! What now?!”

No worries, my friend. This is par for the course…

I spelled it out in my monthly newsletter, True Wealth, two weeks ago:

“The position I’m the most concerned about now… is Silver Wheaton. The price of silver has gone crazy. And individual investors have gone crazy over silver. Silver has soared too high, too fast. My experience tells me silver should see a quick and violent correction to shake out all these newer silver traders.”

[ad#Google Adsense]I told my readers I had considered taking some of our Silver Wheaton gains off the table. But timing when to get back in is difficult…

“It’s much better just to ride through [a correction] when it comes with our wide 50% trailing stop. It’s part of trading volatile stocks like Silver Wheaton.”

Silver (the metal) will be extremely volatile. And shares of Silver Wheaton will be even more volatile. The chart here shows it…

Don’t think the little correction we’ve seen is the end of it… Optimism over silver is literally at a record high.

The last time silver sentiment was near this high (as measured by Jason Goepfert at SentimenTrader.com) was in early 2008 – and silver fell from over $20 to under $10 before year’s end. Silver is volatile!

Silver Wheaton could have a worse correction than silver…

Not because it’s overpriced (it’s not). But if silver sentiment goes from optimism to pessimism, the stock will fall a lot…

In True Wealth, we’ve set up our “trading” of Silver Wheaton to handle its volatility. Our downside risk is limited to about a 15%… and our upside potential is hundreds of percent. Let me show you how it works…

I recommended Silver Wheaton around $27.50. We expect hundreds of percent gains. But we’ll sell half once we’re up 100% (at around $55). With such a volatile stock, it’s nice to “bank” a 100% gain when you have it and let the rest ride to (hopefully) hundreds of percent gains.

For our downside risk, we’re using a wide trailing stop of 50%. Silver Wheaton’s highest closing price since we bought it was about $47. So we’ll cut our loss if Silver Wheaton closes below $23.50 (that’s 50% of $47).

Since I wrote about it at $27.50, if it hit its trailing stop, we’d lose $4 on the trade, about 15%. That’s the downside risk. I don’t expect that, but if it comes to it, we’ll get out and live to trade another day.

Potentially giving up 50% sounds like a heck of a lot. But you have to put it in perspective of risk and reward. As often as possible, I try to set it up where I have three times the reward potential for the risk I’m taking. So if the risk I’m taking is a loss of 50%, my reward potential better be 150% or higher.

Since I think hundreds of percent gains are possible in Silver Wheaton, and I know this is a volatile stock, I am comfortable using a 50% trailing stop in this recommendation. My reward potential is at least three times my risk taken.

The silver trade is too darn popular at the moment. The risk of a violent downward correction is still here. That correction would take the price of silver down, and Silver Wheaton will fall farther.

But when will it happen? And how bad will it be? And when do you get back in?

Since I can’t answer these questions, the advice I gave in True Wealth stands. I will continue to hold Silver Wheaton for the long run. I will ride out the correction with my wide 50% trailing stop in place. In a few years, we hope and expect to cash in hundreds of percent gains…

In the short run, I don’t believe there’s any urgency to buy silver or Silver Wheaton right now.

Good investing,

— Steve Sjuggerud

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Source:  Daily Wealth