I was dead wrong about gold (and that doesn’t matter)

As a swing trader, your primary job isn't to be right all the time, says John C Burford. It's to make money over the long run.

On Friday,I made the bold claim that gold was about to rally. My carefully placed tramlines, Fibonacci and Elliott waves were all pointing in that direction.

I was dead wrong. The market fell hard on Tuesday.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

OK, my analysis wasn't correct. That happens. The important thing as a trader is to ensure that when I'm wrong, I don't lose money.

So, today I want to show you how Friday's incorrect call didn't lose me a single penny.

Advertisement - Article continues below

Here's how I saw it back then



When the 62% level was reached last Wednesday, I was waiting. I placed an order to 'go long' gold (ie, bet that gold would rise in value) at this point, and I placed a protective stop just under this level. I placed the protective stop to cover me in the event that I my analysis was wrong, and the price dropped.

So, I was long gold at $1,220 on Wednesday, and for three days, the market did was I was expecting. It rallied to the $1,235 level for a gain of $15.

That small gain was a lot less than I was targeting from this trade. But it was enough for me to use my break-even rule.

My break-even rule works like this: when I post a small gain on one of my positions, I move my protective stop accordingly. This guarantees that I won't have lost any money on my original trade, while still offering me the potential for further gains.

So, how did my gold trade pan out? Well, yesterday the market took a dive and ran through my stop at $1,220. All my hard work on that trade came to nought but the critical point is that I did not lose money.

Advertisement - Article continues below

The best laid plans of mice and men

Not so fast! The market is exhibiting an inverse head and shoulders pattern. The 'neckline' of the head and shoulders, shown below as a green line, indicates to me that gold is likely to rise from this point.

This would line up well with other supportive factors such as the Fibonacci 62% level at the $1,200 level:


At yesterday's low at $1,203, the market has hit the highly supportive meeting of the head and shoulders' neckline (shown in green), the Fibonacci 62% level and the lower tramline (again!).

This is the last chance saloon for my bullish scenario. Either gold rises from here, or I need to throw away my analysis and start again.

But if this level holds, I expect a rapid recovery.

Don't trade through the pain

This is important, because if I was still holding my long position at $1,220 and desperately hoping for the rally, I would be in a weak position emotionally as I stared at a losing trade. You may recognise this painful feeling yourself, dear reader.

Advertisement - Article continues below

You see, if the $1,200 level were to give way in the absence of a protective stop, my loss would be compounded and a very big chunk would be taken out of my trading account. Ouch. I must avoid that at all costs. You must, too.

That is why I use the break even rule.

This whole episode reveals why even your best guess can be wrong, but you can avoid major loss or even any loss at all.

After all, your job as a swing trader is not primarily to be correct in your forecast, but to make money over the long run. Cut your losing trades, and the winners will take care of themselves.

If you can master that skill, you'll be a super trader guaranteed.



Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020