TOP TRADING

LESSONS OF
2021
TOP LESSONS FROM TRADING IN 2021

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TOP TRADING LESSONS OF 2021

Table of Contents
Top Trading Lessons from 2021 .................................................................................................. 3

John Kicklighter, Chief Strategist........................................................................................................... 4

Ilya Spivak, Head Strategist, APAC ........................................................................................................ 5

Christopher Vecchio, CFA, Senior Strategist ......................................................................................... 6

James Stanley, Senior Strategist ........................................................................................................... 7

Nicholas Cawley, Strategist .................................................................................................................... 9

Daniel Dubrovsky, Strategist ................................................................................................................ 10

Paul Robinson, Strategist ..................................................................................................................... 10

Daniel McCarthy, Strategist .................................................................................................................. 11

Richard Snow, Market Analyst ............................................................................................................. 12

Thomas Westwater, Market Analyst .................................................................................................... 12

Disclaimer.................................................................................................................................. 14

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Top Trading Lessons from 2021

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 over the past year.

Click on each one of the boxes below to learn more about them.

John Kicklighter: Ilya Spivak:

Chief Strategist Head Strategist, APAC
Denying The Wisdom of the Crowds – Even Do More of What Works and Less of What
When It is Bitcoin, Crypto and NFTs Doesn’t

Christopher Vecchio, CFA: James Stanley:

Senior Strategist Senior Strategist
It’s Important to Have Conviction Be Kind, Don’t Rewind

Nicholas Cawley: Paul Robinson:

Strategist Strategist
A Bad Case of Confirmation Bias Be More Open Minded

Daniel Dubrovsky: Daniel McCarthy

Strategist Strategist
Establish Your Baseline Trading Targets, and Risk Management Techniques Matter
Make Sure to Maintain Them

Richard Snow: Thomas Westwater:

Analyst Analyst
Do not pre-empt a move. Always wait for Understand the Risk. Accept the Risk.
confirmation (Long USD/ZAR)

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John Kicklighter, Chief Strategist

Denying The Wisdom of the Crowds – Even When It is Bitcoin, Crypto and NFTs

I am by no means anti-crypto or of the belief that the rise of assets built on the blockchain are fads
that will eventually collapse into obscurity. That said, I definitely let me scepticism around the role
these assets will play in the future keep me from venturing into a market that has exhibited
remarkable volatility when most of the markets I’ve actively traded have struggled for healthy levels
of activity.

Looking back over 2021 (and previous years as well), it becomes clear that my long-term view of
cryptocurrency assets clouded my vision of nearer term opportunities. Looking out 10 or more
years from today, I believe that blockchain-based assets will hold an important place in the financial
system. The security of transaction and the ability to clearly establish ownership represent
exceptional values. Ultimately, I believe these assets will be integrated as something akin to a utility
to the capital and fiat markets. And, as we find with most utilities, they are not particularly active
markets for short to medium-term traders. This may be the future, but it is not our present.

When a new asset or market comes on the scene – which is not too often – there is an incredible
amount of inefficiency as all market participants (users, investors, hedgers, commercials, etc)
attempt to determine its place in the financial landscape. While there are certain companies that
are accepting or paying out in Bitcoin and cryptocurrencies, its place in the system is still very
unclear. Further, the regulatory environment is ripe for sudden changes that can cause a coin or
asset to surge or collapse. In these early years, it makes sense that there will be a heavy influence
of investors, traders and early adopters that are as interested in seeking fortune as to simply
participate in a future transaction vehicle.

Looking ahead to the future, I hope to learn from my unintentional traditionalist tendencies and
seek out the inefficient markets. Whether a new asset, a dramatic policy change, fundamental
change on an economic level or some other seismic shift; there is opportunity to be found in the
fog of determining true value. And, of course, it is time for me to move into the crypto market…

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Ilya Spivak, Head Strategist, APAC

Do More of What Works and Less of What Doesn’t

The admonition that traders ought to let profitable bets run while cutting losing one’s quickly has
long since entered the realm of the cliché. It is sound advice, nevertheless. Applying such thinking
oftentimes distils to trade construction: you should have a better than 1:1 risk to reward ratio, we
are taught over and over again.

Rightfully so. It seems odd to risk losing more in order to gain less. Such a consideration also lowers
the burden of getting it right on any given trade. Consider: with a 1:2 risk to reward ratio – a stop-
loss distance of 10 points and a target of 20 points, say – being right on just one out of every three
trades breaks even, and anything better is profitable.

Nevertheless, overlooking this part of the process is one of the most common trading pitfalls.
Investors routinely find themselves in situations where a string of modestly profitable trades is
wiped out by one or two big losses. A difference of perspective is perhaps in order.

This year, the routine annual review of my own performance seemed to suggest an interesting
alternative. The headline statistics show a net return of 40.6 percent on 58 trades in 2021, of which
40 percent were profitable. That is, account equity grew by over 40 percent even as 6 out of 10
trades lost money.

How did this happen? The average winning trade made about 2.5 times more money than the
average losing one gave up. Intriguingly, the average winning trade was also held for 4.7 weeks,
while the average losing one was open for just 1.7 weeks. In other words, winners were held 2.8
times longer than losers.

Engineering a favorable risk to reward tilt seems more intuitive from this time-based angle: do more
of what works and less of what doesn’t. Practically, this might mean that an already profitable trade
deserves a bit of room to develop, or even merit scaling up. By contrast, a trade struggling to get
above water may be cut quickly.

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Christopher Vecchio, CFA, Senior Strategist

It’s Important to Have Conviction

2021 was a good year if you were long risk across a number of asset classes. But not everyone
found the environment successful, subsumed by the deleterious barrage of negative news
headlines about the COVID-19 delta variant, the omicron variant, supply chain issues, inflation, the
US debt ceiling, Evergrande…the list goes on.

And yet, despite these obstacles, they really represented nothing more than bricks in the
ephemeral wall of worry. Traders that were able to plan their trade and trade their plan came out
on top.

For myself, there were numerous times in 2021, with the benefit of hindsight, that my analysis was
correct, my strategy was correct, but my risk tolerance was too timid. In other words, I left potential
profits on the table by not having enough conviction, too intimidated by what I was reading and
seeing in the news.

Which brings me to this comment from George Soros to Stanley Druckenmiller, veritable macro
trading legends:

"One billion dollars? You call that a position?" George Soros asked his partner Stanley
Druckenmiller. Soros continued, "It takes courage to be a pig."

Druckenmiller’s insight into this comment is timeless:

“It's not whether you're right or wrong that's important, but how much money you make
when you're right and how much you lose when you're wrong. The few times that Soros has
ever criticized me was when I was really right on a market and didn't maximize the
opportunity.”

The point is that when you’ve done your analysis, when you’ve created your strategy, when you
size your risk appropriately, you need to act with courage – with conviction. Don’t let opportunities
slip by; you miss 100% of the shots you don’t take.

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James Stanley, Senior Strategist

Be Kind, Don’t Rewind

Each year at DailyFX we do this article series on top mistakes, and I think it can provide some great
benefit to our readers because we’re sharing roadblocks that we’ve stumbled upon and how we
learned to get over them. Learning from others is one of the most logical ways of moving forward,
after all, particularly in a field with as much nuance as Foreign Exchange.

As a rule I don’t let any single trade really stand out. I control my risk so that this will never be the
case. Sure, I get hit by the same tape bombs as everyone else, watching my best laid plans fly out
of the window.

I just don’t care about them anymore. Nobody cares to hear my sob stories and I certainly don’t
care enough to whine about them. After 20 years in financial markets I’ve just accepted it as a part
of the game. And the more absurd the situation, the more I find myself laughing these days. As a
trader, it’s my job to be able to navigate around these ‘surprises’ because it’s simply an inevitable
part of trading in global financial markets.

But – as I opened in this article, I do think there’s a great value that can be shared with our readers
from these pieces so it’s an opportunity to share our ‘improvements for next year.’

Mine is pretty straight-forward, to simply put less emphasis or focus on fundamental analysis and
a heavier weighting towards techs. In many ways, this is a ‘getting back to basics’ for me. I started
off as mostly a technical trader and I’ve never left the dark art of charting. But I did take on a heavier
implementation of fundamentals in the effort of broadening out my approach. The goal was to give
me more trade ideas: The result was adding in more noise.

And I can’t even say that this is something that’s negatively impacted me. I’m closing the books on
a very decent year where I was on top of the US Dollar move through most of 2021, along with
moves in Q1 and Q4 in the Yen to go along with a number of other ‘wins’. But I can’t say that it was
as enjoyable as prior years when I had a much simpler approach.

In years past I didn’t worry about projection all that much. I knew that my system would alert me to
the scenarios that I wanted to be involved in. A rate decision was simply a vol opportunity,
regardless of what rates markets were saying that Central Bank would do. The technicals on the

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chart would price that in anyways, so, in a way, I was assuming a simple, base-level form of market
efficiency that I still believe holds true.

But, perhaps a more valuable take-away as a lesson isn’t necessarily what I’m going to do next year,
but what I’ve shared in this article regarding mistakes.

Trading is an incredibly difficult game to be great at. And part of being great means bearing
through the periods where you won’t even feel good and, in some cases, you’ll feel the opposite of
great. This is where most traders quit or walk away, and that’s understandable; losing in trading
does bear a financial cost, after all. But if you’ve found yourselves in markets there’s a reason for
it. Maybe it was the idea of fast money that you now know doesn’t hold true. But, if you think about
it, trading is very much alike any other trade, pun intended, that a person can go through.

To be a plumber or an electrician, a person can spend years as an apprentice simply trying to learn
the ropes. Trading, for whatever reason, is one of the few endeavours that someone can begin
with the expectation of instantly being great. Because, after all, it doesn’t take an inordinate
amount of skill to punch a few buttons. And if you get on the right side of the market, it can even
feel incredibly easy to be ‘good.’ It’s with time that this beginner’s luck wears off and that’s the true
test avails itself. And with such a complex problem as trying to forecast the future with imperfect
information, it can be dizzying to know what to look at or how to use it, and that’s where experience
comes in, helping to silence the noise and hone the focus.

You’re going to make a lot of mistakes along the way. If you dwell on them, if you allow one bad
trade to become more than it already is, you’re not going to be doing yourself any favors and, if
anything, you’re going to compound your frustration and animosity with markets. This is why so
many people quit. If it were easy, everyone would do it.

So be kind to yourself, prioritize your own mental health because the sport of trading is single
player game where you’re also your own opponent. Accept that mistakes will happen, and in many
cases, they’ll happen again and again. Just take note, learn from them and move forward, try to
learn what you can so you don’t commit the same mistake twice but as long as you’re learning
something – that’s a lesson and not a mistake.

The key is to remember that surprises can happen in both directions. While it’s the tape bombs
that run your stops that really stand out, the human brain isn’t wired to instantly offset that with

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the time that prices popped in your direction and hit the limit before you even woke up for the day.
That brief amount of joy is easily offset by an equal or even lesser amount of ‘pain.’

But, just like this article turned into being two lessons, surprises are around every corner. The key
is continuing to move forward so that you can find them, while trying to mitigate the downside of
the stumbles along the way.

Nicholas Cawley, Strategist

A Bad Case of Confirmation Bias

Confirmation Bias - The tendency to look for and favor information that confirms your prior belief.

At the start of this year, I was convinced that the US Federal Reserve would start hiking interest
rates sooner rather than later and that US Treasury bond yields would rise accordingly. As the year
progressed, I felt that the Fed was overlooking the potential increase and stickiness of inflation –
transitory, really? – and that the yield on the 10-year UST would hit 2%. By the end of the year at
the very latest. Even when bond yields stayed low, I felt sure that the market pricing was incorrect
and found many articles that agreed with me, boosting my belief further. As yields began to fall,
my frustrations grew, and I started to believe that a ‘bond tantrum’ would likely occur within weeks
with yields soaring to the levels I anticipated. Nothing happened and when the yield on the 10-year
UST fell to around 1.25% in mid-July, I threw in the towel. And to make things even worse, for years
I traded corporate and government bonds for a living on behalf of a range of banks. If I had made
this year’s call at any of those banks, I would have been job hunting by Autumn.

The problem with confirmation bias is that you become increasingly stubborn with your outlook
with any price action that moves against your position wrong in your view. This can lead to other
fatal trading errors including removing your stop loss or doubling down. Next year I will learn to be
humbler and try and always read, properly, the opposite argument to my view and be honest
enough with myself to admit when I am wrong.

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Daniel Dubrovsky, Strategist

Establish Your Baseline Trading Targets, and Make Sure to Maintain Them

In 2021, I became sloppier with sticking to my established baseline trading targets. These are
derived from your risk-reward ratios and include the maximum you are willing to take a loss on any
given trade as well as the minimum target profit. Had I remained consistent with them, I would have
walked away from 2021 a better trader. These further underscores the importance of risk
management. After setting up a proper trading strategy, maintaining consistency with your risk
management is the key to improving yourself as a trader.

In an ideal world, one would be able to cut their losses short and let their profits run as much as
possible. This is as opposed to a specific 2-to-1 or 3-to-1 profit/loss ratio target. With effective
stop-loss management, cutting losses short can be achieved without much of a hassle. Getting
your winners to run beyond your baseline target is trickier, as markets often don’t move in a straight
line. Before you can even get to that point, in my opinion, a trader should first be able to maintain
consistent risk management by sticking to their established targets.

Paul Robinson, Strategist

Be More Open Minded

My top mistake of 2021 could be labelled as more of an oversight, and one that is perhaps
grounded in an irrational bias. While I’ve certainly became increasingly ‘hip’ to cryptocurrencies, I
haven’t exactly embraced them as much as I probably should have. This has resulted in me leaving
a fair amount of money on the table. My scepticism and resistance towards trading them more
aggressively is mostly based on the lack of belief in the long-term viability of cryptocurrencies, but
if the liquidity and price movement is there, should one really care as long as it is treated as a trading
vehicle? Especially when cryptos, namely the big ones like BTC and ETH, adhere so well to
technicals. And given I base most of my decisions off the charts it only makes sense to gravitate
towards and not away from the most liquid cryptos. The strong adherence to technicals that
cryptocurrencies demonstrate should come as no surprise given the emotional and volatile nature

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of the market. At any rate, my intention is far from becoming a full-on crypto trader, but if the set
up fits the plan then I’ll treat them with more respect.

Daniel McCarthy, Strategist

Risk Management Techniques Matter

“In speculative markets, you win not by picking the soundest investment, but by picking the
investment that others, who are playing the same game, will soon bid up higher.” – John Maynard
Keynes

A quote from a hundred years ago remains as pertinent as ever when considering the outlook for
crypto currencies. In early 2013, I was working in a trading room and watched in amazement that
an “asset” had gone from USD 10 to over USD 100 in a matter of months. A room full of professional
traders could not believe they had missed an opportunity like this – a ten bagger.

Research and investigation into bitcoin left me none the wiser of the merits of this new currency. I
walked away. At the start of 2021 I tried to re-enter bitcoin and duly set about working on entry
and exit levels to optimise return and mitigate the downside. The problem was that I applied
standard risk management techniques. Bitcoin has wide spreads and high volatility. Traditional risk
management meant that I reduced position size. However, wild swings in price saw my stops being
clinically taken out on a regular basis.

The problem is that bitcoin can literally go to zero. It may not, but it could. In my opinion, the correct
stop loss level for a long position in bitcoin is USD 0. In hindsight, my position size should have been
much smaller. Investment managers look at a number of measures to weigh the worthiness of an
asset on a risk adjusted basis. Investors will look at the expected return against the risk being
undertook. Sharpe or Sortino ratios are lined up against maximum drawdown and many other
measures of risk.

There is no perfect measure of risk and as traders, profit or loss drives risk management. Value at
Risk (VaR) is a measure used by many financial firms to analyse the probability of a loss. It takes into
account the volatility of an asset and the expected maximum loss within the parameters stipulated.

If I had looked closer at the bitcoin VaR reading, this would have reduced my position size
significantly as well and allowed me to stay in the trade.

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Richard Snow, Market Analyst

Do not pre-empt a move. Always wait for confirmation (Long USD/ZAR)

Living in the past can be a death sentence for a trader, not to mention a sub-optimal way of one
living their own life. Without the ability to pick yourself up and move on, well you’re likely resigned
to living with the same things that created your past.

But in trading, there’s no better feedback than failure. So, it’s important to learn from our mistakes
while picking ourselves up and brushing ourselves off. And for last year, there’s one mistake that
really sticks out in my mind, and that was a long USD/ZAR setup.

In a year where emerging markets (EM) enjoyed much of the ‘risk on’ sentiment that followed the
global economic recovery and record low interest rates in the developed world, naturally the ZAR
stood out as a strong performer against the dollar when compared to its EM counterparts.
However, since June 2021, the ZAR looked to have set a new low and had started to give back a lot
of its earlier gains. This brought about opportunities to buy dips at support. After prior success, the
opportunity to enter just before support was too tempting to pass down as I looked to enter at the
best possible level. USD/ZAR broke below support and continued lower before turning just a few
pips below the stop loss level. Waiting for confirmation of a bullish continuation would have been
the right play here, which in hindsight is obvious.

Thomas Westwater, Market Analyst

Understand the Risk. Accept the Risk.

Trades that offer the potential for a high return almost always come with a high amount of risk. A
smart trade comes with an understanding of that underlying risk. However, merely understanding
that risk isn’t enough. You have to be able to accept that risk. In 2021, I was in the mindset that my
trading strategy was sound just because I was able to define the risk of my trades and set my exit
and take profit levels.

However, I learned that understanding risk isn’t quite the same as accepting the risk. Too often, I
found myself worrying about a trade even though I defined my risk. This owes more to the
psychological aspect of trading – often something that is the biggest roadblock to being a

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successful trader. Looking back, I realized that just because my risk was defined didn’t necessarily
mean I accepted the risk.

If a trade is causing fear or psychological discomfort, it should warrant a timely review of your
entire strategy with a specific emphasis on risk tolerance. Moreover, given the mental acuity
demanded to trade in today’s dynamic markets, it is important to keep yourself as sharp as
possible. That means keeping yourself healthy with a regime that includes adequate sleep, diet and
exercise.

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