When we wrote our opinion about the GBP/USD pair, we said that we thought that the GBP/USD was going to go down, and we even stated an objective between 1.2800 or 1.2750.
Now, we can see that is exactly what happened: The price went down and made a minimum of 1.2763 to rebound until now (we are writing this on September 18) at 1.2976. So what is next?
*Keep in mind this position earns money when the price goes down.
We want to talk about this, not to brag about the strategy because every strategy can be right or wrong, so we do not play with forecasts, but with chances. Then, let’s not pretend we are always right because we are not. The real intent of this article is to put ourselves in the place of someone that for any reason decided not to sell when the goal was achieved, and who is now still invested in the position. Let’s see what lessons we can learn from that.
Lesson: Each investment has its goal; and when it hits the goal, we need to leave.
We need to leave or at least re-analyse the investment as if we were to enter into it from scratch. After the new analysis, we should only continue if we think that, if we had not already been invested, investing now would be a good option.
Why?
Because our brain plays dirty tricks on us, and the investor always wants to keep the position open and wait to see if it is possible to gain a little more. Do not be greedy. If this objective was enough when you did your analysis, it should also be now.
Then, what typically happens to the novice investor is that having seen the goal achieved (in this case at 1.28), he sees how the price rebounds making him lose money while wishing that the price would magically go back down (remember that we win if the price goes down).
This is a mistake. If the price does not give any signal that it is about to rebound, the investor could stay; but as soon as he sees the smallest inkling of a rebound appearing, it is time to leave because the price is stopping on a support (that is why the goal was also placed at that level), and that means that the most likely behaviour is to have the rebound.
There is another reason.
When you work with objectives and stop-losses, you only trade operations in which the expectancy of the result is positive. Therefore, in theory, your losses with the stop-loss should be fewer than your wins with the objective.
However, if you do not sell in the objective, there is a rebound, you panic, and you sell, you may be selling when the relationship between the wins in the objective and the losses in the stop-loss are negative instead of positive.
It is true that in this specific operation you are still winning, although less than what you wanted. However, you will have operations that will go wrong making you lose money, and you need the long-term expectancy to be positive. For that, the times in which you win, you have to win more than the times in which you lose. In conclusion, you do not have room to sell in the rebound when you had the chance to sell in your objective.
By selling after the rebound, you convert your winnings in only a share of the winnings you should get in the strategies that work; so in the long-term, your losses will be bigger than your winnings, and that is not a good strategy.
In other words, you need to stay with your original analysis.
What could you do now?
Now, let’s say you have succumbed to the temptation, and you did not sell in the objective. The price has rebounded to 1.2976. You have lost part of the profits; and worse, you do not know what to do.
In this situation, you cannot let your brain to get anchored to the old numbers. The profit you once had is not important, and what you need is to set a limit to the losses from the objective level to avoid converting a good operation to a bad one.
For that, you can put your stop-loss in the previous day’s maximum; so as far as the price continues going down, you will increase the winnings. But if the rebound continues, you cut the losses.
*This article is only informational, may be wrong and it is not financial advice.