Friday, August 22, 2014

My Confession: Leverage and Trading is hazardous for health

In August of 2013, I started trading with CFDs with real money. Before that, I was only practicing with a demo account and I was doing quite well with my different strategies. Needless to say, virtual money and real money are quite different because of the reality of it.

Since I went live with real money, CFD trading has been a mixed bag for me. The very first month, I was up about 140% of my capital. When you read those advertisements in the shady column of newspaper or online ads, they aren't really lying. It is really possible to accomplish such feats, but only with leverage. Leverage though, is a very dangerous beast. While it obviously magnifies gains and losses, they don't tell you that when you increase your leverage amount, your risk-reward ratio actually drops.

Anyway, given my giant ego back then, I thought I was a market wizard. What did I do? Naturally, increase my capital. When you count gains in raw percentage, you can get a bit greedy. What is better than a 140% gain on $100 capital? A 140% gain on $1 bazillion dollars of course! I didn't have a bazillion dollars, but I did increase my capital, and boy did it vanish quickly.

It is very addictive, really. My friends ask me why I don't like to play casual card games for a bit of money or why I don't hit the casino. The truth? It's not that I don't like gambling. I just like gambling in the financial markets a lot more. I can do it at home, in front of my computer, in underpants, listening to music, watching TV and having a snack. Any time of the day. Well, as long as the markets are open.

After feeling all those "max pain" moments, I think I did become a better trader though. When I started trading, I would watch the 5 and 15 minute charts and sometimes drop to the 1 minute chart. I stayed up late all night watching the markets. If I was underwater, I wouldn't be able to sleep. If I was above water, I'd be so anxious to defend my unrealized profits. It was really quite horrible. On top of all of that? I was losing money. I kept changing strategies and I was trading too often.

These days, I trade just a few instruments. I hold my position for a couple of days, sometimes weeks. I don't feel so anxious or jittery anymore, even when I am underwater. I am a lot less emotionally affected and I don't think about my open trades every minute of the day.

One of the best things for me was to join and sit in a trading room. I didn't pay for any trading course by any special guru or anything like that. This was just a free chat room that traders just sat around, shared charts and talked about market news and opinions. A very nice older, experienced trader helmed the room and he really gave very good and sagely advise. I probably spent a few months sitting in that room every trading day, hearing stories from all sorts of different people. From professional traders with hundreds of twitter followers, to stay-at-home mom's trading out of boredom and to earn some pocketmoney. It was a really diverse group of people. However, it was in that room that I realized a lot of things about trading, and patience being the most important factor of all.

Slowly but surely I improved. I started to block out all the "noise" that you can hear from news channels, websites and blogs, and just started trading with a fairly simple but logical strategy. At the lowest point of my trading career, I went from 100% of my capital to a mere 18% of my capital. I had lost 82% of my capital! For me to get back to 100%, I would have to gain 455% from where I was!

Well, that was a few months back for me. I have since bounced back and steadily pushed up from 18% to hit back to a high of 68%, before slowly sliding. I'm back down to 36%, but hey, if you think about it, I made a 100% gain from my lowest point!

My ultimate goal isn't to be a professional trader. For me now, I would just like to slowly but surely "breakeven". I know what is sunk costs, however but I refuse to accept defeat. I just want to breakeven, so that I can say to myself, "Yes, you paid your tuition fees, but the knowledge that you gained from that tuition have already paid for themselves".

People should know that trading and investing are 2 completely different things. It requires massively more skill and emotional tenacity to succeed as a trader. People get confused that investing is just like trading. Or they get confused that investing IS trading. It really isn't.

My final thought on trading and using leverage: Limit your total exposure. My maximum exposure was only 10% of my assets at the point of my highest greed and addiction. Since then, I have accumulated more assets, so that percentage figure is down. I aim to comfortably keep it below 5% of all my assets. Basically, this 5% of my assets is my casino gambling money. There is upside, but a capped downside. Any silly or crazy trades that I decide to act on in my trading account prevents me from messing around with the other 95% of my assets. I really run that 95% bulk of my assets with a medium-long term perspective about at least 3-5 years to infinity. Basically, only gamble what you can afford to lose. If you are losing sleep at night, that means you are overleveraged and should cut down on the amount of money in your trading account.

I hope any prospective traders might learn a few things from my experience. All the best trading!

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