My first attempt at day trading was a disaster. Where did I go wrong? I thought I would share the mistakes I believe I made…
I’m going to start by admitting that I made some silly mistakes and that there is no-one to blame for what happened but me.
I’ve written this article for two reasons:
- To analyse the mistakes that I made
- To share the mistakes made so that hopefully people will not follow in my footsteps
Before we begin, let’s just clarify what day trading is…
“Day traders are different from investors in that day traders hold their securities for only one day. They close out their positions at the end of every day and then start all over again the next day.” (http://www.dummies.com/personal-finance/investing/what-is-day-trading/, accessed 27/06/2017).
It is also worth clarifying what is meant by ‘buying’ and ‘shorting’ a financial instrument for the purposes of this article. Buying is when you bet on the value of the instrument going up. Shorting is when you bet on the value of the instrument going down.
We should also spend a minute thinking about how brokers make their money.
In general, they sell financial instruments for a higher rate than they buy them for.
The price they will sell for will be slightly higher than the market rate and the price they will buy for will be slightly lower than the market rate.
This means that whenever I buy or short a financial instrument, I am already playing catchup. For example, if the market rate for a financial instrument was $100, the sales platform might sell it for $101 and may buy it for $99.
So if I buy a unit for $101, the market rate for the instrument must go up enough that the sales platform will be prepared to buy it back from me for more than I paid for it. In this example, that would mean the price would have to go up by a minimum of $2 before I would make any profit.
The opposite is true when shorting a financial instrument. This is how you make money.
The final thing that I need to cover before I tell my story is the concept of leverage.
I won’t go into all of the detail but in summary, leverage is a way of gaining the potential profit of buying more units than you can afford.
For example, if a broker offers a leverage of 1:30 as my broker did on the Ethereum crypto currency, this means I could get the potential profit of 30 units for the price of 1.
The important thing to note is that you are also susceptible to the loss for all 30 units.
Ok, so I think I am ready to tell my story now…
On Saturday (24th June, 2017) I was speaking to my brother about crypto currencies and some of the amazing growth that they have seen over the last few years and months. For example:
- Bitcoin was selling for $214.08 on January 12, 2015 but hit $2,851.07 on June 5, 2017. If my math is correct, that is roughly a 1230% increase
- Ethereum was selling at $8.43 on January 3, 2017 but hit 393.75 on June 13, 2017. Again, if my math is correct, that is roughly a 4570% increase
I thought to myself, great… I want some of that.
So I decided to setup an account with a well known broker (plus500)
When creating a new account, I could either create an account that uses real money or a demo account that uses fake money. This was my first mistake as I decided to create an account that uses real money without first getting a feel for the platform and how day trading works.
When creating an account, the broker had an online questionnaire asking about my previous trading experience. After submitting the questionnaire, they said that they would not recommend this type of trading. My second mistake was ignoring this (thinking I knew better) and creating an account anyway.
The next step was to add funds to the account. My third mistake was getting sucked into the first deposit bonus without reading up about what that meant and what the qualifying criteria was.
I was only going to put a few hundred dollars into the account but then I saw that the broker provided a deposit bonus of $190 if I deposited just over $1250. I thought great, free money - why not? Big mistake as $1250 is way more money than I can afford to lose.
It turns out that you have to make qualifying trades to earn points. Once you have earned enough points, then the bonus is released into your account. What this means is that you need to risk quite a lot of money before receiving the bonus.
Ok, so I had money in my account, what did I do next?
I decided (without any real research) that the volatile financial instruments were where the real profit was. My logic was if price was bouncing up and down, there were lots of opportunities.
As I was discussing crypto currencies earlier and the cheaper ones seemed fairly volatile, this is where I should put my money in. To be honest, I'm not sure whether this was a mistake?
So I took a buy position on 2 * Ethereum @ $303.19 on 25/06/17 hoping that it would go up to over $306.19, which is when I would be in profit. Another mistake I made was not putting an automatic order to close at a certain loss price.
The price stayed fairly stable for most of the day but it started to drop about 8 hours after purchase. As the price started to drop, I naively assumed that it would bounce back up to I saw this as an opportunity to buy more. So I continued to buy more as the price kept dropping totalling 13 separate purchase transactions. My last buy was at $288.377, at which point I could see my potential losses mounting (already $200+).
Rather than accepting the relatively small loss at this point, I decided to see what happened. Again, none of my purchases had an automatic order to close at a certain loss price.
When the price dropped to $275.1, I had racked up potential losses of about $400 so I decided that the risk was too high to keep buying. Instead of selling everything and accepting the $400 loss, I decided to accept the four losses at the time that were the worst, which was about $185 as I still thought if the price cam back up, I could make a profit on the purchases I made at the lower price.
An hour or so later, it was still going down, so I got a bit panicky and decided to create an automatic order to close the rest of my purchases of $260, which would be about a 14% drop in the price since my first purchase.
When I woke up the next morning, I saw that all of my purchases had automatically closed causing a further loss of about $635. I felt sick... how could I have let this happen...
Despite the big loss I had made my final mistake was naively assuming that it would bounce back that day, so I made another two purchases, then got nervous when Ethereum kept dropping and sold again racking up a further loss of about $50.
This is how I lost roughly $870
If I had done some research before my first purchase, I would have seen that the telltale signs were there for a price drop on crypto currencies or at the very least a period of uncertainty.
As it turns out, my timing was very very unlucky as I happened to jump in at exactly the wrong time, during what has been dubbed 'Massacre Monday'(https://www.cryptocoinsnews.com/bitcoin-price-leads-the-way-as-crypto-markets-declare-independence-from-weekend-slump/)
As I submit this article, the price for me to buy Ethereum is nearly $278.
So what of my day trading future? I must admit, the experience was so disastrous and stressful that I was very tempted to simply say that it is not for me and to close the door to the whole thing.
However, I hate giving up on something especially when I don’t really understand it.
After some careful thought, I’ve decided that I want to stick with it but I really need to spend some time understanding it and coming up with a strategy. So for the foreseeable future, the following applies to my day trading future:
- Do not use real money until you become confident with the day trading and your broker of choice. There are lots of sites that offer demo accounts where you can practice using real time prices etc. without risking your own money
- Only make a trade if there is a reason for making the trade rather than just trying my luck. To do this, I’m going to put together a criteria list for either buying or shorting a financial instrument.
- When I do decide to start trading with real money, I am only going to risk money that I can afford to lose.
Before I finish the article, I just want to state that I have no complaints with my broker (plus500). Everything that happened was down to me and the mistakes that I made.
Analysing where I went wrong was helpful for me and I hope this post is helpful for some of you. Please guys and girls, be careful...
If anyone wants to share their mistakes or recommendations, please post a reply.
More posts to follow... if I ever decide to trade with real money again