A
friend of mine lost a lot of money in the equities. That was right after he
boasted, how he had found the perfect strategy to make money in the markets. I
just smiled. People think they are smarter than the markets. Think they can
outsmart the system. It doesn’t matter that all the intelligentsia tells them
to leave trading to the experts. They have to think they understand the
markets. They have to take positions they can’t afford. And after they have
lost enough, they claim to have become wiser and state something that goes like
this.
”Trading is only
gambling. You might get lucky on one day, but in the long term you are only
headed for ruin.”
Long
Term -
That’s where I had the problem. What is this long term? Is there a short term
too? If so, when does this short term becomes long? Another adjective used to make you believe
that you have learnt something new. My friend traded for a week. So I guess
that’s the length of his long term. There was no point in aggravating him by
pointing the mistakes in his logic. But I was surprised how easy it was for him
to forget the simple concepts of probability.
”When you toss a
coin, there is a fifty percent chance of getting a head.”
This
doesn’t mean that heads and tails alternate. It just means that if you tossed
the coin a large number of times, like say ten thousand, then number times a
head comes up would be close to 5000. But it was true only if you tossed it a
very, very large number of times. Not a few hundred. Surely not ten times. As
long as you were in the market for a very long time there was absolutely no way
that you would lose all your money. On the contrary, there would be lots of
lucky days coming one after the other and all I would need to do is quit at the
top.
It
can never be known when a person thinking for a second person would start
addressing it as a personal problem. I took up the challenge. I would trade
daily for a period long enough to have more lucky days than losses. Below are
my diary entries for the period.
Sunday - I have chosen a system
provided free by my broker. It is a simple system created by subtracting moving
averages. I also learnt about stop loss. I would never have a big loss. I found
it funny I could tell when the indicator turns bullish or bearish, by observing
for just one day.
Monday – I took a bet. It is a
bet and no matter what the probabilities, I am okay with the thought that there
is only a 50% chance of winning. The first chance I lost. That didn’t bother
me. I was in for the long. I rechecked the system and realised that I had
obviously interpreted the system incorrectly. Guess I got the nerves. I tried
again. I followed the rules perfectly. This time I struck gold. The system sure
does seem to work. I tried once more and again I was right again. Cool!
Just one day and already 2% up.
Thursday – I followed the same strategy for the next few days. I would have surely quit if the system would have given me many losses. But this system is great. I am getting good profits. Seven trades and just two losses. May be I should increase the invested amount.
Friday – Increased the amount invested four fold. Also reduced the stop loss a little. I think I have lost too much on the two trades.
Tuesday – Twice the markets
moved through my stop loss and moved back. Stupid stop loss! Would follow a
stop loss only in my head from now on.
Wednesday – Market moved up 2%.
I am up 15% today! Amazing! In six months I wouldn’t need a job. HAHA! Expect
more exclamations tomorrow.
Thursday – Markets crashed. Bad
luck! I am stuck with a big investment. This happens. Surely the market would
come back tomorrow.
Friday – Still invested. Have
lost Wednesday’s profits. But I am sure the markets will be up on Monday.
Traders are probably on leave this Friday. I should have a taken a day off too
after Wednesday.
Monday – Started afresh with
new positions. A very good morning. Made two good trades already. This week I
would get back Friday’s loss.
Tuesday – Great day. The
indicator isn’t perfect. I have accounted for its flaws. Traded completely
without any system Feel free. Made a killing! Up 12% today. I am sure I can
predict accurately. Count over 40 trades till now and hardly 10 losses. Those too
because of a stupid system. I guess I won’t have to wait for six months even!
Wednesday – Going all in.
Doubled the leverage. Also have to go out for lunch. Not really worried as I am
sure that I am right. Didn’t get to see my profits materialize. Tomorrow morning
should be a big day.
Thursday – Got up late! Just in
time to see the market open. Don’t know what happened. For no reason the market
crashed. Checked MSNBC - They think it is a system flaw. I got away from the
PC. Not in a mood to have a bad day. Anyway the markets would be up tomorrow.
Friday – All trades rejected by
broker. I call them, but all lines to the broker are busy. Having nothing to
do, I try to check how much profit I have made till now. Probably 40% percent
up, except for yesterday. I check my
profits. No tables. Just a message – “All positions closed as you have run out
of margin. Deposit $426 to resume services.”
It
had taken only two weeks to wipe me out. Luckily, I had put in a just a few
percent of my savings. It pained me to realise that I had spent a few months
doing real hard work to earn that amount. At least I had learnt so much about
life. I wish I had listened to my friend’s advice. Well I guess the only way to
know that fire burns is to burn one self.
Jack never again tried to trade. Having no entrepreneurial
skills he slogged for rest of his life at his job and retired in a nice house.
He occasionally consoles people and teaches the importance of working hard at
you job and has them promise that they would never again venture into the
markets.