I was dead wrong. The market fell hard on Tuesday.
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.
Here’s how I saw it back then
On Wednesday, I showed this chart. It had impressive tramlines and they were intersecting with Fibonacci levels:
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.
The best laid plans of mice and men
So with my best guess from Monday dashed on the rocks, is it time to change my view on gold? Is gold about to resume its decline, as so many pundits believe?
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
So now I have no net position in gold after my previous trade hit its stop loss. I am now free to open another trade.
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.
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.