In today’s article we’re going to do something different. Through a realistic example, we  shall highlight the difference between trading what you see, as opposed to trading what you think. Sometimes the difference can be subtle. After the example, you will be asked to describe your view and what insights you have gained.

Case in Point: GBPUSD

News is issued saying that the former Bank of Canada Governor Mark Carney has been appointed as the new Governor of the Bank of England.

Given this news, 2 Traders buy GBPUSD at  1.6500

Trader A is convinced that Carney’s inception will be good and that the UK will outperform the US. He is outright bullish GbpUsd.

Trader B is also convinced that GbpUsd is a good choice because the market has shown strength recently, but also is cautious because Carney’s inception may have been partially discounted. His stop loss is 1.6400.

The next day, data comes out in line with expectations, but Cable takes a hit: it drops to 1.6420 and closes around there.

Trader A sees this as a discount. His reasoning is that the fundamentals haven’t changed much, since 1 news item cannot change the trend. He buys another position at 1.6420.

Trader B’s stop loss is close. His reasoning is that the market may have been too confident and has discounted more than meets the eye. He keeps his stop loss in place, will take a hit and re-enter if the trend holds.

The next day, the Bank of England changes their forward guidance. The market sells off to 1.6300.

Trader A thinks the reaction is exaggerated, and there is no real negative implication from the change in forward guidance. He buys another position at 1.6300, getting a better average price of 1.6400 on 3 positions.

Trader B is cautious. Market selling off on neutral news. He takes his loss and waits. His timing was wrong but the market is still moving down.

Finally, the next day bad GDP numbers come out and takes Cable to 1.6150 and closes at 1.6200.

Trader A starts to loose his sleep and finally pulls the plug on his position. His loss is:

300 pips on 1 position + 220 pips on 1 position + 100 pips on 1 position.

Trader B notices strength after the data hits. The market had fully digested the negative outcome and closed higher. He buys at 1.6200 with stop below 1.6150.

Cable gains 200 pips the next day with no news. Trader B is now in profit (-100 pips + 200 pips = +100 pips) and Trader A is frustrated.

What’s the main difference between the two traders, in your opinion?

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.