28/8/2015: What can a newbie trader learn from the events of this week?

Hello traders,

So how have you fared this week?  Well I did say on my Sunday post that this would be an interesting week!

I was struck by some of the comments on forums and Facebook pages by people about their experiences of being on the wrong side of markets or not understanding what was going on. Or simply not realising how some spread-betting companies operated when the volatility got too much.   I’ve had quite a lot of contact from traders this week asking for help with the problems they’ve found themselves (some in horrendous positions) and some of them genuinely bewildered that the market (and their brokers) could act in such a manner.

It’s pretty much small-beer to a miserable old guy like myself but it did make me realise that I suppose that if you’ve only started trading since the GFC of 2008 then new traders would not have too much experience of market melt-downs.

It’s rare that I answer or add to others posts or comments on pages but I found myself writing this the other day in response to a comment from a trader who had never experienced such events as those at the end of last week and the start of this one:

These events come around every few years. First time you’re a spectator (like I was during the Asian Crisis of 97-98) wondering what the hell happened? Then you start getting a bit nervous during bubbles (I got out a week before the Dot Com Crash in early 2000). Then you start rubbing your hands with glee and looking forward to them (2003 Gulf War 2) (2005 London bombings) (2007 Credit Crunch starts) (2008 GFC) (2012 Abenomics starts) (2014-5 Euro QE) (2015 SNB Un-peg) (2015 China) These things come around all the time – you just have to keep your powder dry and have a plan to profit from them.

For those of you who are completely new to trading and are wondering whether the world will end the truth is that it won’t. Markets were here long before you were born and in all probability will be here long after you depart this mortal coil. Trading is one of humanities oldest professions. Markets may change, humans generally don’t.  This really is a long-term game for people and you should be thinking in terms of 10 years or so rather than 10 hours!

What can you take away:

1. Risk Management is key: You’ll hear me go on about this again and again. Whilst this weeks events are in no-way a ‘black-swan’ event (its been coming for a while) hopefully this will have given some new traders the experience of realising that when markets have melt-downs (or melt-ups) it can happen quickly and violently. That sounds great when you’re on the rights side of it – it can be a disaster when you’re on the wrong side (especially when leverage is included). Risk management is something you do every day…not just when you think the markets are a bit ‘wobbly’ (as one new trader remarked to me recently).
2. Leverage: Linked to the above point. Leverage is what allows most retail traders to operate in markets. However it is a double-edged sword. WHen it works for you its fine. When it works against you it can be an account killer – especially if there is no proper risk management being conducted. Always know your Trade Risk, your Capital Risk and your Position Sizing. And stick by it, day after day after day.
3. Your broker is not your friend: I’ve had lots of emails from people complaining about their spread-betters behaviour this last week or so. Slippage on orders, being stopped out or simply unable to access their platform. If you’ve traded long enough you’ll know that is pretty standard behaviour. You shouldn’t be alarmed. That’s standard. You should be prepared instead. If your account size is decent then you should have a proper trading account. If you’re using a spread betting platform then you should manage your account size, and your positions like a hawk. If there’s a discrepancy then get on the phone to them straight away and don’t be put off.
4. If in doubt; get out! I keep telling people that “your first loss is always your smallest” so if you find yourself in a bad position on the wrong side of a market, just get out. Dont hope that the market will come back and save you. Once or twice it might, but normally it wont. Better to be on the sidelines wishing you were in a good move rather than being in a bad move wishing you were on the sidelines!
5. The big picture always gives you clues: Don’t be afraid to look at the bigger picture on monthly and weekly charts – they often give clues of the market running out of steam and ready to roll over. Just because you trade 5 Minute charts doesn’t mean you can avoid the overall bigger picture. Use it as a means to generate trade ideas and opportunities for you.
6. Keep your powder dry: These opportunities come around again and again. You just need to be patient and also to keep your powder dry. Once you have some experience, competence and confidence in your trading then you may be in a position to profit from some moves. Make a plan before the markets open, if it acts like that then take action. If it doesn’t then give it a miss. Just be ready to have some ammunition to fire off when the ambush gets triggered!

That should do for starters. I am sure that regular readers will have plenty of other sage advice from their own experiences of trading through major market events. Please feel free to add them in the comments section and I’ll update this as I go on.

Take care and trade well!

Paul