Tuesday, July 01, 2008

The midnight Forex Trader

A short anecdote I thought I'd retell here.

During winter down here, my day job takes up all of the available US market hours. So, the other day, needing some extra cash to give to my knee doctors, I thought -- "Hey, what better way to get the money back than through trading forex with absolutely no positive expectancy in my trades, just hoping to get lucky."

Ok, admittedly, I was a little more confident going in....but I shouldn't have been.

By way of background, I am the worlds WORST currency trader I believe. I'm the only person I know who lost money shorting the dollar in the last 5 years. If you go back and look at a long term chart of the Euro/USD I was long the EUR during the one "blip" there it actually went down...I gave up the ghost at 100-1 leverage at 1.19 if I remember right. It's now 1.58 --- grrr... :)

Anyhow, I thought, it'll be different this time....I have a new trading platform (interactive brokers -- I've actually had it forever, but my previous experience with currencies kept me away from actually playing the forex market).

Well, I kicked myself the last time that I saw the Yen go under 100/dollar...I had been making the call for quite sometime that it was ripe. But, when it moved, it move FAST...over 10 percent in a week.....guys who were 100/1 leverage 10x'ed their money.

So now that it was back around 108 again, and the dollar had shown some inexpicable strength, i thought it might be a time to play some more dollar weakness....

So, how it works is that you can buy the JPY/USD cross or the USD/JPY cross. In my "old" forex account I only bought or sold the usd/jpy. If I wanted to short the dollar, I would just sell this cross, at the time about 108, and then buy it back later for (hopefully) a lower price.

Leverage in Forex

So, one of the things that got me into trouble last time was the insane amounts of leverage available to you. A lot of the bucket shops and fly by night forex platforms will give you just enough leverage to hang yourself. at 200x leverage a small move can wash you out pretty good.

So, I was thinking that if I didn't lever in too heavy I would have a better chance of learning the ropes before I inadvertantly tied a hang man's noose.

Now, part of my confusion is that Interactive Brokers shows me two forex clearing houses to trade in, IDEAL and IDEALPRO (?) Pro, has much better spreads, like maybe a pip or two, but IDEAL (i'm guessing) has wider spreads but the ability to trade with a lower amount than the gross domestic product of chile at risk.

So, I tried to buy in with what I though was 10x leverage on my risk capital...that way if i caught a 1% move in the underlying I'd be up 10% (or vica versa).

I got the trade on (at 107.79) and the spread was between 3 or 4 pips....so it was bidding 107.79 - asking 107.83

I needed for the ask to fall BELOW 107.79 to make any kind of profit...where i could buy it back and take off my short.

immediately the currency pair started bouncing around and IB's interactive profit/loss indicator was kind enough to show my what was happening to my account. GOOD GRIEF....I must've messed something up....Within minutes I was $1250 down....and the bid/ask had barely moved against me.....

Now, forex and the currency markets run 24 hours a day as they chase around the globe. Here it was 2:30 in the morning and I was sweating to death. Did I understand the platform well enough to set a stop and have it be triggered successfully? I didn't want to bail on this trade because I thought it was right. But I didn't want to get washed out either...good grief....this may have been a time to try some "paper trading" before going live :)

I wanted to go to sleep but i didn't dare.

I optmistically placed a buy order (to go back flat) at 107.76 (if i remember right). After 20 or 30 agonizing minutes, it cleared!!!

There I was, breaking the cardinal rule of trading....letting your losses run, and cutting your winners short. But, good grief. I didn't want to be that leveraged. And I needed some sleep before trying to get confident with the stop loss orders for the IB's currency trader.

I was freaked out...I was still sweating...my heart rate was elevated....I'd just made 450 bucks in 30 minutes....as nice as that sounds, i'd chopped 4 years off my life and taken unwise risk with my portfolio....stupid stupid stupid...

"Well, at least that will pay for the MRI I need to get on my knee, " I thought.

OK....so, when I go in to check my account the next day, there is really no difference. Where'd the 450 go?

Puzzled I went back and studied the chain of events a couple of times. After another 1/2 hour of looking at everything it finally dawned on me.

I'd "banked" 450 YEN on that trade. Not dollars. I'd been down 1400 YEN at one point in the trade....about 14 bucks :)

Ee gads....what a lesson. There is something that paper trading can't do, and that is mimic the real world emotions that your body goes through when you have a trade on. To stay emotionally detached -- especially if you're stupid enough to be betting with money you can't afford to lose -- that's going to be pretty challenging (read: impossible). You're going to do stupid things like cutting your winners short.

The yen is now 2.5 percent lower (a couple of days later). If I would have placed that trade right and had the guts to stay in it, I would be up about 25%. But I didn't. And, I didn't.

All in all, I think the lesson into my own tolerance/threshold for pain and my bad trading habits (at least in forex) was worth a lot more than the 25% i would have gotten.

....Ok, lunch is over....back to the salt mines....
Uruguay Guy

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