How not to trade like a loser
AS SOME OF YOU may know, I’ve been participating in the Global Trader “What’s Stopping You?” trading competition over the past three months. The theory behind the initiative is to empower retail investors to take charge of their finances and understand their approach to their investments. It kicks off with a quick assessment of your personality and makes some broad comments on investment types that might be suitable for you, and I think that’s quite an important step to take. Mine came back suggesting I’m something of a volatile trader who tends to trade for the sake of trading rather than exercising much discipline.
Up front, I’ll say I’ve proven to be something of a loser when it comes to spread trading, having contrived to drop roughly R9 000 trying to “beat the market”. Truth be told: if Global Trader hadn’t given me R10 000 to trade, I’m not sure I’d have had the confidence to start trading their products again. For that reason I tried to make a conscious effort to chat to my dedicated sales trader about each of my trades before I launched into them.
Two and a half months into the competition I felt much better about myself. I hadn’t managed to lose any money and was up about 7%. However, one thing obvious to me was that I was spending a lot of time staring at my computer screen – sometimes till US markets closed – to be up a couple of hundred rand.
I made some calculations and worked out that if I’d traded twice in the competition by riding out positions on Sasol (bought at R336) and Standard Bank (bought at R104) I would have made more than triple the money I made by trading every day. Makes you think.
Below are a couple of observations I’ve made for those thinking about taking up spread trading.
Don’t come home from the pub on a Friday afternoon after a few drinks and convince yourself you’re Gordon Gekko II. I did that once and in a click of my mouse button I’d committed 80% of my capital to a long position on the Nasdaq when I meant to commit 8%.
Just because there are 50 plus products or markets to choose from doesn’t mean you have to trade them all. Stick to things you know and feel comfortable trading.
If you have to get up at 4am to check what the Nikkei is doing and how that might influence your yen trade and you need to buy protection for your soybean trade, which is falling out of bed, then you’re overdoing it.
Leveraged trading is very stressful: remember two trades outperformed trading every day.
With leveraged products you can be blown out of the water with a share, commodity or currency moving 1% to 2%. I found it good for sanity to commit some extra margin to my stop-losses to give me a bit of peace of mind.
In my humble conclusion, spread and contracts for difference (CFD) trading is a mug’s game for a large percentage of investors. If you have images of yourself emulating Michael Douglas then you’re probably better off putting some money on the soccer or rugby: you’re at least potentially going to make money (unless you’re backing Liverpool or the Lions).
However, if you’re prepared to be disciplined, recognise your own limitations and take the time to work out how the products work, they can be a nice way of getting into trading or investing. If you’d like to try out the Global Trader “What’s Stopping You?” assessment, you can find it at www.wsy.co.za.