A good trader never stops learning, and every mistake is another potential learning experience. Here are some of the top lessons our analysts learned, absorbed or suffered from our personal trading in 2016.
Top Lessons:
• John Kicklighter, Chief Strategist: Plan Better for Less-Than-Perfect Trading (USD/JPY)
• Christopher Vecchio, Currency Strategist:Holding a Winner Means Fighting Human Behavior
• Jeremy Wagner, Head Trading Instructor: Expect the Unexpected
• David Song, Currency Analyst: Tracking Key Market Themes Beyond Monetary Policy
• Jamie Saettele, CMT, Senior Technical Strategist:Beware Confirmation Bias
• James Stanley, Currency Analyst: I Caught the Top on the S&P (But the Top Won)
• Ilya Spivak, Currency Strategist: Conviction is good. Being hamstrung by it is not.
• Tyler Yell, CMT, Forex Trading Instructor: Think Like A Quant (Price-In Outliers)
• Michael Boutros, Currency Strategist: Become a Disciplined Trader – Avoid These Mistakes
•Walker England, Forex Trading Instructor:Keep Your Analysis Flexible
• Paul Robinson, Currency Analyst: Shaking a Big Picture Bias in Favor of Short-term Set-ups
John Kicklighter, Chief Strategist:
Plan Better for Less-Than-Perfect Trading (USD/JPY)
For me, the best trades are based on situations in which fundamental, technical and market conditions perfectly align. As you can imagine, such ideal convergences are rare. As a self-diagnosed pragmatist, I don’t simply wait for perfect market weather patterns to act. If that were the case, trades would come at about the same frequency as solar eclipses. Adaptation to realistic – in other words ‘imperfect’ – scenarios is a crucial aspect of successful trading. This is something that I had figured out many years ago and even accounted for in my trading approach; but in practice this past year, I had certainly grown lax on in application.
With my work and personal life demanding more of my attention, I resorted to a practical solution with my trading: take only those trades that were most appealing by checking off all three major criteria. With a narrowed focus and the broad swath of options wiped off my radar, I let many trades go by – good and bad. The one that sticks out most prominently in my mind was the USD/JPY’s climb starting at the very beginning of the fourth quarter. The technical cue was the break on an impressive bear trend channel. Market conditions promoting rebalancing a far leaning market would back the move. The missing pillar for a trade was my skepticism that a robust risk appetite sentiment had room to take root and thereby lift this wayward carry pair. Yet, the speculative winds did pick up, particularly following the outcome of the US Presidential election. USD/JPY, in turn charged its strongest two-month rally in over two decades.
The question on how to prevent perfection from rendering you inert is answered with a relatively mundane solution: better planning. Making accommodations for less-than-perfect setups for me means taking trades that don’t hit all my criteria but adjusting exposure to account for the lower conviction. That can mean smaller size, shorter duration and/or more proximate targets/stops. Taking a few trades out of the USD/JPY’s remarkable run while keeping risk in check may not have netted the entire 15-plus percent charge, but it would have been significantly better than no trade at all.
Jamie Saettele, CMT, Senior Technical Strategist:
Beware Confirmation Bias
I was able to scratch out a small gain for the year but 2016 was a difficult year for me trading wise. Heading into 2016, I subscribed to the narrative that the USD topping process was going to translate into a widespread USD decline. The idea was based, in part, on the following;
Exhaustive EURUSD low in March 2015 at a 30 year trendline
USDJPY top at the 1990-1998 trendline in June 2015
DXY high in December 2015, which was divergent with EURUSD (not at a new low) at the time, a classic turn signal
Long term cycle lows in AUDUSD (lows are 7 or 8 years apart since 1985)
January 2016 reinforced my thinking that the USD was putting the finishing touches on its advance before a big drop. If you recall, ZAR crashed and reversed, AUD/USD reversed, and a number of major commodities, including copper and oil, reversed.
Captain hindsight tells me that the reinforcement of my thinking in January was due to confirmation bias. In other words, I was looking for information that confirmed my preexisting beliefs and not giving equal weight to alternative possibilities (specifically, DXY breaking to new highs and EUR/USD breaking to new lows). The solution? Confront the held opinion and consider the alternative. This fix sounds simple but in practice is difficult. The fix requires a change in mindset but there are physical steps to get the process started, such as writing down the alternative argument on paper to taking more breaks from the screen to think in a peaceful setting.
Even so, managing risk from a technical point of view (respecting price) kept me from disaster. I may hold certain market opinions, but I’m not risking capital unless price gives me reason to do so. That was a lesson learned over 10 years ago!
Jeremy Wagner, Head Trading Instructor:
Expect the Unexpected
Someday, years into the future, I think we will look back on 2016 and realize what a crazy year it was. 2016 was the year Bank of Japan adopted negative interest rates, Brits voted to divorce from the European Union, and the United States elected a reality TV star as president. Many experts were not expecting any one of these events to take place. For all three to happen in a 12-month span is amazing.
This leads me to the theme of today’s writing…unexpected IS a possible outcome.
Too often, we look at a trade set up that has all indicators pointing in the same direction. Price is sitting in the zone where a pivot is highly likely to occur so we lick our chops, as we get ready to feast on the market. Perhaps we get too aggressive on the amount of leverage used and then…something unexpected happens.
The next thing we see are large losses floating in the account. Our emotions begin to take over as we scramble to mitigate or possibly even ignore those losses. Our decision-making ability is impaired because we are emotionally overcome by this unexpected event. At that point, we may cut the trade and double down in the reverse direction. But wait, how can the market reverse against me like that?
Perhaps you have experienced similar situations like this. I have found the best way to overcome that emotional state is to prepare for the unexpected…even if it is just mentally accepting it as a possible outcome.
A verbal thought often made in the US Opening Bell webinar is what if price screams in the opposite direction we are anticipating.
To answer that thought, we will look at using the unexpected scenario as a bias and what the possible patterns may be. At what point will we have to accept the reversal as a possible new trend?
You see, while thinking about the unexpected, you begin to mentally prepare in case it occurs. As a result, the emotions of the unexpected event are reduced because it is not as big of a surprise to you. When your emotions are under control, ‘cooler heads prevail’, as they say and your decision-making abilities remain stable.
You are able to react quicker with steadier decisions. You already have price levels identified that when broken command your attention to change your bias in the trade.
Therefore, the next time you see consensus of forecasts suggesting an outcome or the odds of something happening being elevated, spend a little time to prepare for an unlikely outcome. Identify levels and think about what a market might look like under that condition.
Ilya Spivak, Currency Strategist:
Conviction is good. Being hamstrung by it is not.
A raft of failures plagued forecasters in 2016. Investors failed to foresee Donald Trump’s victory in the US presidential election, the last-minute OPEC production cut accord, and the outcome of the Brexit referendum. For the latter, they also overestimated how much instant turmoil a Leave victory would visit upon the UK economy and markets at large.
