Trading Catastrophe: A First-Timer’s Big Loss
Sooner or later, it happens to everyone who trades: the big loss. Forex trader Rob Booker shares his experience with The Big One in this humorous and heart-felt excerpt from his book, Adventures of a Currency Trader.
My wife was excited for me, but she was anxious that I start making money. It
was hard to argue with her about that. If I didn’t make money, then we
were going to have to dip farther and farther into savings. We did have the
money from selling off all our cool stuff and the savings/severance, which meant
we had $30,000. I had put $5,000 of that into my trading account. Gini didn’t
mind at all, especially considering that I was planning a trade with the supervision
of a bank trader and it seemed more reliable this time.
It shouldn’t have seemed like trading was urgently necessary, but when
she spoke, it was impossible to remain patient. I had what might be the chance
of a lifetime for a currency trader – to follow an order and pick up on
the momentum created by a major bank.
“The longer you take to start trading, the less in savings we are going
to have,” she said that evening. “And if you start making more good
trades, we can keep more in savings, and maybe even have more to use for trading
down the road.”
“That is true.” Although her words conflicted with what I had promised
Harvey, she was my wife first. I wasn’t married to Harvey. I didn’t
have to put a roof over Harvey’s head. I didn’t have to buy him
food or school supplies. So I decided that I would take a look at the charts.
The first chart I opened was the four-hour chart for the EUR/USD (see Figure
14.1). Harvey told me that I could trade it if I could justify it, and that’s
what I intended to do. To miss out on a trade that he and Hank Doorecker had
planned-it was too much to resist. Perhaps his
admonition not to trade had been a test: to see if I could adequately justify
a trade on the EUR/USD. Just to see if I was really listening.
I saw nothing. There wasn’t anything here I could work with. Zero. What
in the world were they looking at over at U.S. National Bank? What was so inviting
about selling the Euro? I could see that it had tanked on Friday after the jobs
report. I could see that it had now risen back up a bit. Big fat hairy deal!
That didn’t give me any trade ideas. I couldn’t justify selling
it now or at 1.2200, for that matter. What was going to happen at 1.2200? Harvey
had said that bank traders didn’t necessarily have access to better information.
Well, apparently they did!
That’s when the phone rang. It was Craig Taylor.
“Harry, I hear you’ve met with Harvey. That’s the word on
the street.”
It was good to hear his voice. Not only did I need to thank him for setting
me up with Harvey, but I needed help on this trade.
I told him how much I had learned already and how much I appreciated the introduction.
Then I told him I was stuck. “I can’t figure out where they go with
this trade idea,” I admitted. “Harvey told me that I could trade
it if I could justify it, and I sure do want to trade it.”
“What are you looking at?” he asked.
“The four-hour chart,” I replied. “I have been explicitly
commanded not to look at short-term charts.”
“That’s good. You’re working from one of Harvey’s favorite
time frames. So you’ve made a good start. What else do you have on the
chart?”
“Nothing.”
“No indicators at all? No trendlines?”
I admitted that although I had read about all those things, I’d not found
the time to implement them. “Well, Harry,” Craig began. “You
first of all shouldn’t start with the idea of trying to figure out what
Harvey is thinking. That’s not going to work. If you are going to justify
this trade, you are going to have to come up with some type of analysis of your
own.”
“I have no idea where to start. I know what a trendline is, but I’m
not sure what to do with them.”
“I gotta run, Harry. You can figure this out. But doing some testing
and experimenting on your own is going to make a huge difference.”
Forcing myself to do some lines
I sat in front of my computer screen for at least 20 minutes before making
a move. Determined to not give in, I prepared myself to sit there until I at
least drew some lines or plotted some indicators on my chart. I finally decided
that I would at least draw a line at the entry price of 1.2200. I would start
there. That was my goal: the number that I wanted to justify. After I drew the
line, my chart looked like the one in Figure 14.2.
At least I had a starting point now. I could see where I was planning to buy.
Was it wrong of me to be back doing this trade? Although I was doing my own
research here, I couldn’t take credit for the original idea. It occurred
to me then that Harvey wanted me not only to explain why the trade was reasonable,
but also to start developing my own ideas. Harvey had other traders to work
with. He wouldn’t be available forever to keep feeding me trading ideas
that I would go home and justify. Part of what I wanted to do that night was
to figure out how to plan these trades on my own.
The books I’d read had a lot to say about indicators-moving averages,
oscillators, and so forth. It seemed rational that I would jump into some of
those. So I added a 200-period moving average as a dotted line. The moving average
was just what it sounded like: an average of the price over a certain period
of time-in this case 200 periods of four hours each. Once plotted, I saw
that it hovered above the current price and seemed to have stopped the currency
pair from rising earlier in the month of April. Perhaps the average would stop
it again and that was a good justification for the trade. But how could I say
that price was going to hit the 200 moving average again? And that it would
fall back? That was stretching things a bit.
The books also talked about oscillators. These were indicators that supposedly
showed when a currency pair would be overbought (and ready for a move down)
or oversold (and ready for a move back upward). I flipped open to a page in
one of the books that talked about the stochastic. That seemed popular enough!
So I added that, too, with the standard settings of 14, 3, 3. This time I was
getting closer. The stochastic was rising and nearing the top. Could it be as
simple as that? That I could sell the pair every time the oscillator reached
the top? And buy every time it reached the bottom? Perhaps. But there was no
way that Harvey was basing his entire trading system on something that simple.
The MACD, or moving average convergence-divergence, was an indicator of momentum.
It was basically a way to follow a trend, built from moving averages. Perhaps
that would provide an extra clue. One of the books talked about adding a second
or third indicator to confirm what I was seeing on the first. That seemed reasonable-getting
some backup. Actually, it sounded more than reasonable. It was perfectly clear
to me that any successful trader wasn’t going to base his entire strategy
off one indicator. No wonder that I had felt uncomfortable with the stochastic
alone. Or with just the moving average. So I added the MACD, with the standard
settings of 26, 12, and 9. I didn’t really know what those meant, but
who cared? I was trying to justify a trade, not write a book report on Gerald
Appel, the creator of the indicator.
It told me nothing at all. I could hardly understand what it meant in the first
place. Now I had a hill-and-valley shaped thingy in the middle of the MACD and
some lines crossing above and below. The lines were underneath and the
hilly shape was sort of flat. Ho-hum. This was worthless. I’d really rather
see the indicator with the hills going down or the lines going down as soon
as the EUR/USD price hit 1.2200. Maybe Harvey and Hank Doorecker had a computer
program that could predict that the MACD would be topping out or heading for
a move downward once it got to their special entry price.
What if I could also find that at the same time the price was hitting the 200
moving average and that the Stochastic Oscillator (a measure of when a currency
pair had moved too far in either direction) was overbought? Now I was getting
someplace. Still not sure that I had enough to justify the trade, I decided
that I would add some other indicators.
The next one that I added was a Fibonacci retracement. I drew a line from the
highest recent point the pair had reached, all the way to the lowest point it
had reached. This then produced a series of numbers in between the high and
the low, where, according to one of the books in front of me, price was expected
to encounter resistance, or selling pressure. The 50 percent level of the retracement
that I drew was right at 1.2182. Now we were onto something! Perhaps Harvey
was watching for price to rise up to this level, where it was more likely to
fail and go no further. I liked this. If I could show that the Stochastic was
overbought, that the price was nearly hitting the Fibonacci retracement level-I
might be able to justify taking the trade.
I had plotted a lot of stuff on my charts at that point. Well, that’s
an understatement. My chart looked as if a book on technical analysis had exploded
all over the place (see Figure 14.3).
By this time, I had been working for four hours and my family was asleep. I
hadn’t even heard my wife put the kids to bed. This process had consumed
me and I was really getting into it. Another candle was forming
but it wasn’t going anywhere. Price was stalling at the 1.2100 mark and
not going anywhere. I was exhausted. I hoped that I didn’t have to show
Harvey my chart before I took the trade, because I intended to sell the
EUR/USD just like he was going to do, and I had my justification.
My wife stumbled in a few moments later and, rubbing her eyes, looked at my
chart.
“That looks complicated,” she remarked.
“It does,” I admitted. “I’m not sure I know what all
that means. But I think it is telling me that the Euro is going to be a good
sell trade when it gets to 1.2200.”
“That’s the trade that your friend Harvey is going to take?”
“Yes. That’s right.”
“Why don’t you take it now?” she asked.
She had just risen from bed so I could understand why she was confused. “The
price has to rise another 100 points before I can sell it,” I told her.
“We’re going to sell it at 1.2200.”
“If you know it’s going to 1.2200,” she replied, “why
don’t you buy it now?”
Then she walked back into the bedroom. I wasn’t sure if she had been
sleepwalking or if she really meant what she said. But it made sense! She was
right! If Harvey was so sure that the pair was going up and then was going to
be a good sell, then why not make some money on the way up, and then on the
way down again? Wow! That was brilliant.
I looked at the chart more carefully. Price seemed to be drawn like a magnet
to the 200 moving average-it was surely on its way up there all over again.
And the stochastic was showing that it was trending upward and not overbought
yet. It had more room to go! And the MACD, like I had seen earlier, was rising,
with the hill on the top side forming just now. And price was moving up toward
that 50 percent retracement level.
For the next 30 minutes, I added a few more indicators that seemed to be all
telling me the same thing-it was rising upward and I was going to be able
to buy it on the way up. So I opened my trading platform. I had $5,500. If I
traded long now, I stood to make 100 pips. If I traded $1,000,000 in currency,
that would be $100 per pip, for a gain of $10,000. That would be a huge gain
and bring back way more than I needed to pay for a month of bills. It would
redeem just about everything I had done before I started making stupid decisions.
I clicked on my trading platform, entered and double-checked the numbers, and
took the buy trade.
At 12:35 A.M., I bought at 1.2098. It cost me $2,500 in margin to make the
trade.
I did not place a stop loss or a take profit order. I just pulled myself up
from the computer table and stumbled into the bedroom and fell asleep. I didn’t
even get out of my clothes.
THE NEXT MORNING: FLAMES FOR BREAKFAST
The next morning as I was gulping down a glass of carrot juice, I realized
that I could have been a tad bit zealous about trading the Euro. I can remember
a splash of carrot juice running down the front of my Wakeman, Butterman, and
Bailey “20th Anniversary” T-shirt. I can also recall my son tugging
on my shirt sleeve, asking when he would could play on the “tomputer”
that day. I also can clearly hear my wife’s voice asking me if I took
her advice and took the trade upward. And I will never forget what the chart
looked like when I walked calmly to the computer, started up the charting program,
selected the EUR/USD, and then choked. It looked like Figure 14.4).
Oh, crap.
This wasn’t going to look good. Not to Harvey. I suddenly realized that
no matter how much research I’d done about selling the Euro, I’d
bought it on pure speculation. Once again, I had fallen into the trap of believing
I could game the system. Thinking that I knew more than I really did, I had
managed to get a second margin call. I was down to $2,500 in my account. I had
lost more than half the account!
Even worse, I realized that I had made the right decision. Looking at the chart
(Figure 14.5), I found that I had actually made a trade that eventually would
have been profitable-if I had not traded such a large lot size, the trade
would still be open at 8:00 A.M., with some smooth, tasty profit
waiting for me. Sure it had fallen right after I’d bought it. But then
it just climbed right back up!
No way! That was not fair! I had certainly picked the right direction. I had
made a good choice. But my timing was off. My trade size was too big. My amateurish
analysis had created a spark that led to a full trading account conflagration.
With half my trading account in ashes, what was I going to tell my wife? I now
understood that I’d made the right decision and I could engage in some
redemptive revenge trading. If I could get back the money I’d lost, I
wouldn’t have to say anything about it at all. So what if I’d lost
half the account so far! I could gain it back by just understanding my error
and correcting it.
I’d read about this in the trading books. When a trader makes a bad decision,
he should admit it readily and not stubbornly grip incorrect assumptions about
the market. Better to gulp down some pride, reverse the trade, make back the
losses and move onward.
I clicked on the order button to buy $1,000,000 worth of currency- just
as I had done the night before. Figure 14.6 shows the response.
Insufficient funds! I didn’t even have enough money to execute a standard
lot trade!
I needed $2,500 in order to do a standard lot, and that’s all I had in
my account-which would leave nothing for available margin. That meant
I had to reduce the size of my trade. Which I did. I traded a half standard
lot, or $500,000 worth of currency, for $50 per pip. I bought the EUR/USD at
a price of 1.2119 at 8:05 A.M. on April 7, 2004. It cost me $1,250 in margin
to make the trade.
This wasn’t far from where I’d bought before, but at least now
I knew it was going up. At least I understood what I’d done wrong and
could make it right. I felt a sense of righteous retribution against the market
for having treated me so poorly. Everything I did in these few moments was done
with pure emotion.
I didn’t move. I couldn’t hear my wife or kids or phone or anything
in the background. It was me against the market and nothing was going to get
in the way.
At 8:10 the pair was trading 11 pips lower, at 1.2104, and I had lost $550.
At 8:15 the pair was trading 17 pips lower, at 1.2098, and I had lost $850.
These amounts were staggering to watch. How could I watch this much money go
by? If I’d watched this happen the night before, I would have closed the
trade early and not withstood the damage. Should I do that now? I asked myself.
Should I close it? If I closed it and it simply went in my direction, then what?
I’d lose more money and be even farther in the hole. The only solution
was to hold on tight.
Between 8:20 and 8:40, I got some delicious deliverance from the savage fall-the
pair traded up to 1.2107 and was closing the gap on my loss. I knew I’d
made the right decision and took a break to use the bathroom. My family was
gone, probably to the park or something. It didn’t matter. I’d have
good news for my wife when she returned with the kids.
When I returned from the bathroom, I’d been margin-called.
I felt and heard a thumping sound in my head.
Whump!
I rubbed my forehead. A beastly headache was forming in the back of my head,
which was the section of my brain probably used for storing numbers, such as
the amount of money I just lost.
Whump!
Now what? I had lost $1,250. I only had another $1,250 left. This was all I
had left from what had been a $5,500 account just a few hours earlier. Why hadn’t
I stopped? Why couldn’t I have at least taken some of that money out when
I had the chance?
My wife’s iPod sat on the desk in front of me. Cradled in its connector
thingy to the computer, its silky white face mocked me. The navigation wheel
looked like a giant mouth, laughing openly at my predicament.
There was nothing much left to lose. If I lost it all now it didn’t matter.
What was $1,250 at this point? What did it really mean? Not much anymore. If
I lost it, I couldn’t feel much worse than I felt right now. If I gained
back even $125, I would have doubled my account from this point and at least
would have the satisfaction of not having given up. Clearly, the EUR/USD had
never intended on going all the way up to 1.2200. Switching to the four-hour
chart, I noticed that the stochastic had never reached the overbought area but
was starting to turn downward.
It was never going to get to Harvey’s number of 1.2200! Instead of rising
up that high, it became exhausted near to his number and would turn downward
for at least 50 to 100 pips. So I sold. After waiting for one more five-minute
candle to close lower and prove that I was making the right decision, I sold
at 1.2082 (see Figure 14.7). I could only afford to sell $200,000 worth of currency,
for $20 per pip, and it cost me $500 in margin.
It only fell 3 pips lower. It never even covered the spread. Not for one second
was it profitable. It only took about 37 pips before I got a margin call.
Whump!
Whump!
Whump!
I stared at the $500 in my “available equity” column until 10:15
A.M., when my wife returned with the kids.
She banged open the door, called out to tell me she was home, and then cheerily
yelled over to me: “So, Harry, how did that trade work out last night?”
Then I threw up.
Rob Booker is a foreign currency trader and a trainer
of traders. His Web site, www.robbooker.com,
and blog, www.piptopia.com, are two of the most
popular destinations on the Web for traders, and both provide educational and
inspirational materials on trading. Booker has the reputation of being one of
the best trainers of traders in the foreign exchange industry. Hundreds of people
he has trained now trade for a living. Booker’s growing popularity is a result
of both his success as a trainer and his ability to impart his knowledge in
an appealing manner through stories and anecdotes.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from Adventures
of a Currency Trader. Copyright (c) 2007 by Rob Booker. This book is available
at all bookstores, online booksellers and from the Wiley web site at www.wiley.com,
or call 1-800-225-5945.