The Only Good Thing About Losing All Your Capital In Your First 6 Weeks Trading Is…

…the knowledge that things can’t really get any worse for you, can they? If this statement were actually true, there’d be a heck of a lot more people like you and me trading for a living. The reality for a trader seems to be that no matter how bad things are; they can always get worse.

After blowing up my first (test) trading account of £50, I proceeded to open a second account with a starting capital of £500. I tried my hand at some larger trades (£1, £5 and even £10 a point) until I’d lost 50% of my account. I then attempted to take stock of my situation and improve my system.

After laying down what I thought were clear ground rules in a new system, I still managed to lose almost all of the remaining balance on my account and I’m now sitting with a capital balance of £80 – from £500.

There were several reasons for this, some of which I’ve summarised below:

  • I did not have a system of exactness for each trade
  • I traded on the spur of the moment in many cases
  • I chose my stops based on the proportion of capital I was prepared to lose rather than base them on price indicators such as support/resistance levels, moving averages. This resulted in stops that were too tight.

What Do You Do When You Lose All of Your Trading Capital?

Analyse. Measure. Test. Improve. Try Again

Maybe you’re in the same situation as me and you’ve lost all your capital. How are you going to deal with it? I guess there’s two things you could do: 1) Quit. 2) Try again.

I am firmly in the try again camp – and will be until I have exhausted every possible thing I can try to improve my trading system.

Fortunately, I only used capital that I had spare and haven’t lost life savings or anything like that and hopefully you haven’t either.

As far as my trading goes, I know I made mistakes and I know how to correct them. That’s why I’ve taken plenty of time out over the last couple of weeks to analyse my past trades, speak with a few fellow traders and update my trading system to reflect the things I’ve learned.

I’ll post the rules of the new system in a later post because what I’d like to do to finish this post off is a bit of in-depth analysis on a couple of my past trades.  The lessons learned in these trades will form the backbone of the new trading system.

Avoid Your Newbie Trading Mistakes: Barclays Losing Trade Analysis

I placed this trade on 24th August. I had been using IG Index as my spread betting provider. I used their trading system which has a defaul watchlist of ‘UK Banks’ and ‘Popular Stocks’. Barclays appears in both of these lists.

At the time of the trade, Barclays had recently had the news about the LIBOR rate rigging scandal in the media followed by the resignation of the CEO. This adversely affected the share price more than it deserved – at least in my opinion.

My reasoning was based on nothing more than common sense and figures, and despite all the bad news, Barclays were still making billions of profit. To my mind, it had to be undervalued at 187p per share – especially in comparison to the state-owned bank RBS which was trading at 224p a share.

A few days before placing my trade, the Barclays share price went from 180-ish to touch 200 briefly before it fell back again, I guess, as people decided to take profits.

Round numbers, especially in the hundreds, seem to form a kind of psychological or systematic resistance level and I assumed this is what was happening in the Barclays share price.

I had every confidence it would rise to and go higher than 200 again so I opened a long position at £5 a point at 187. I only wanted to risk £40 on my trade, so set my stop at 8 points lower, believing that I would just catch the upward movement.

I made two mistakes in opening this position.

  1. My stop was backward. I should have chosen my stop based on previous support levels or some kind of measurable indicator, rather than an arbitrarily decided ‘8 points’.
  2. I entered the position with little thought. Had I had a proper system for entering trades in place (for example, like the one I will now use in all trades going forward) I wouldn’t have entered the position until a few days later.

The first arrow is where I entered. The second is where I was stopped out.

As you can see from the charts, my hypothesis was correct. Barclays was undervalued and people were more fearful than sensible and, as common sense returned and a new CEO was appointed, the share price started to rise quickly.

The problem in my trade was that my stop loss was too tight. Had I had a better way to choose stop losses, like I do in my new system, I might have still been sitting in this trade at a handsome profit.

For examples of some trades that I have placed (or would place) with my new trading system, follow me on twitter, where I have identified a few trades that look good.

Here’s a Trade That Worked, Can You Identify Why?: William Hill Winning Trade Anlaysis

This was probably my best single trade I’ve ever made. The only problem was that since I wiped out my capital in my actual spread betting account, I had to use a play account over at Bull Bearings. However, had I had the money, I would have made this trade exactly as described and the analysis I used to make it form part of my new trading system.

I am a fan of the gambling sector – I spread bet, what can I say?

I have been watching this share for ages, since the early part of 2012 and have had it in my virtual portfolio over at Hargreaves Lansdown since Jan. I have followed all of the RNS news releases and have set google alerts to let me know when any new will hill news is posted.

The trend is clearly upward with no real signs of slowing down any time soon and the price is still a long way off pre-2009 highs. There is a clear upward bias.

I’d been watching the share closely to try and gauge the daily momentum so I could ener at the right time. On about the 10th august, the price fell through a previous support level (a support level is a price that other investors seemed to not let the price fall below, it is identified by the fact that for quite some time, the price was unable to fall below it) and the price went lower than it had been for about a month.

There was also some minor negative news came out about the time and an analyst re-rated the target price – in effect, the analyst believed te price should fall. The share price reacted in accordance and stopped it’s upward movements.

The next technical support level as indicated by the chart was at 290. I told myself that I would wait until the share price hit 290 before opening a long position in it.

A week or so later the price did hit 290 and I opened my fantasy spread betting position at £100 a point. Looking at the charts, I saw no reason why this price would not climb back to the previous support level of 310, with a little hike higher just for good measure (it was an upward trend, afterall).

I set my limit/get out target at 315.

As you can see from the chart, the trade played out exactly as I thought it would, and the price has now broken through previous 12 month highs.

I took my fantasy £2500 profit at 315.

A few things I did absolutely right with this trade:

  1. I watched the share price for a long time before entering the position. I felt like I had a good chance of being in sync with market sentiment.
  2. I waited for the right entry point. This was based on previous support levels.
  3. I set myself a reasonable price target and closed the position when I planned I would.

There is one unanswered question with this one though and that is that if I had this position open for real, would I have closed it at 315 or let it run? Would I still be letting it run?

What would you do?

Remember, It Cost Me £500 To Learn These Lessons So Don’t Do The Same

There are some excellent lessons in each of these trades and all of the observations I made since closing the positions have been applied to my new trading system, which I’ll outline in a future post.

The next step for me now is to refill my spread betting account with another £500 at the end of the month and try again for October.

If you can’t wait until my next post to read about my new trading system, you could always follow me on twitter to see which trades I make and why I make them.

Afterall, I still have £85 in my account which I’m playing with in the meantime 😉

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4 Replies to “The Only Good Thing About Losing All Your Capital In Your First 6 Weeks Trading Is…”

  1. I reckon I spent about £250 on my training materials, and about £1000 in losses before I started to “get it”. A year later and i’m up 38% (as of today) but it has taken a fair amount of time and money. You don’t need me to tell you this as you seem to be a motivated and switched on guy but don’t give up. Keep going, learn from your mistakes and keep up with your education/literature.

    Check out my recommended reading page and have a look at Nick Darvas’ book “How I Made £2m”. If you haven’t read it I’d erm….”recommend” it 🙂

    1. Nothing teaches you the error of your ways like losing money 🙂

      38% return is extremely good going, I hope it keep going for you and I only hope I’ll be able to emulate that kind of return – well, beat it would be nice too 😉

      I’ve not read that book yet but will take a look – I’m a kindle (Kindle App on an iPad/Android phone, actually) reader so hopefully there’s a digi version. Audio books preferred though cos I can listen while I do other stuff.

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