Let me tell you about one of my trading experiences, it will highlight just how dangerous trading can be at times - if you don’t approach it in the right way.
It was 2006 and I was starting to get heavy into the precious metals sector. I was financial spread betting at the time (if you don’t know what that is, it’s as leveraged just like FX but you can trade a whole load of markets).
I was big on the gold mining equities.
I’d just had my first great trade on Newmont mining, and thought for some reason I was master of the universe.
I was flying down to Phuket from my home in Chiang Mai, for a two-week holiday, meeting my folks there at the hotel.
They were coming from the UK and I hadn’t seen them in over a year.
At the time I had discovered this whole new way to trade, ‘spread trading’ (nothing to do with spread betting).
It seemed a great way to trade – you didn’t even have to call market direction.
Just trade one fundamentally strong asset against a weaker one.
I was heading off on the plane that morning and the night previous had put on my first spread trade.
I cannot remember what sort of crude analysis for choosing it – but I went long Barrick Gold and simultaneously shorted Placer Dome.
I think Placer was trading around $22 and Barrick was around $35.
I reached the hotel and for the rest of the day couldn’t be bothered looking at the markets, the beach seemed more appealing.
I was relaxed, pretty much thinking with a trade like this what possibly could go wrong?
Because it was a spread trade, and a fundamental play I didn’t even need a stop (lol).
I think it was Saturday morning before I finally logged into my account.
It was down 40%!
WTF?
No, that wasn’t a typo and no it wasn’t my broker playing funny buggers.
It was legit. I was a down nearly half my trading capital over say two days at most.
As it was weekend and I had to wait to Monday to close the trade.
What had happened?
You might think I’m using artistic licence here – but I swear this the truth.
I’d opened this spread trade on one day and the very next day, Barrick Gold had announced a takeover of Placer Dome.
Now if you don’t know what that means I’ll tell you – the takeover candidate (Placer Dome) rose about $13.00 and the acquirer (Barrick) fell about $10.
In FX that would be damage of 1300 pips on the first and 1000 pips on the second.
And just the opposite of my position. I’d gone long the acquirer and short the merger target.
I got totally creamed.
Killed on the Placer side and I killed on the Barrick side. And I hadn’t even used a stop!
What has’ this got to do with forex?
Well, trading is trading, regardless of the asset class. And where leveraged is concerned we’re all in the same boat.
It was a dumbass move of the highest order.
The thing I learned the most from this was just how good I was at deceiving those I love when it comes to covering up trading losses.
My dear Dad did ask me why I was so quiet at breakfast that morning. I replied I was fine, just a little tired.
Underneath I was in complete agony but I was able to put on one helluva poker face for the whole time we were there.
It wasn’t the best of holidays for me as you can guess.
Trading is the loneliest business in the world, few of us ever talk about our losses.
This is doubly true for beginners.
The moral of all this is:
New traders hear of trading styles that sound so wonderful and are in a rush to implement them; without doing the least bit of research, back testing or forward testing.
For a brief time when their trading accounts are full they’re confident in their ability – too confident.
OK, not every beginner is like this - BUT I was, which makes me think others are too.
When you do eventually suffer a big loss from being too brave it then sets you up the stage for a whole litany of trading problems.
Overtrading, searching for holy grail systems, and blind belief in trading Gurus who, you kid yourself can bring your account back into the black
In trading, you need a long-term mindset, by that I mean you must resist the impulse to take trades on the fly without any thought - you shouldn’t be in a rush to make money.
Trying to make the fast money will only result in the opposite.
Take your time, trade on a demo, back test systems, become an expert in one simple methodology first, and then bet small with real money.
I often wonder what would’ve happened if I’d not taken that one Barrick trade. It subsequently took another five years for me to find profitable consistency.
Being a newbie is like being a teenager. You ignore the advice of wise elders thinking that stuff cant happen to you.
But it can, and it will, if you don’t slow down and truly accept the possibility of financial loss before putting hard-earned cash to work.
(Aside from the fact that you’re also an optimistic person)