[Diary of a trader]

The following week I have to go to Americaand will rarely be anywhere near the systemduring trading hours. The only sensible thingto do is to hedge existing positions – which,again, means going short on sharemarkets.

TUESDAY September 27, 2011My week in America, attending the WorldBank/IMF annual meetings, is an apocalypticseries of news conferences and meetings ofleaders who are supposed to bring the worldaway from the threat of recession and eurozone collapse. To say they don’t inspire muchconfidence is like saying the Titanic had aslightly disappointing maiden voyage. Themarkets, unimpressed, crash; the Dow losesalmost 400 points on the Thursday.

So with my short positions on worldsharemarkets, I must have made a fortune,right? Wrong. Although my call onstockmarkets declining was entirely correct, Imanage instead to lose half my moneybecause I failed to take into accountvolatility. On the way down, markets bounceand wobble and my stop­losses are too close

to the level at which I bought – so I get wipedout, despite actually having been right.

Seeing this, I then go short again, with awider stop­loss, and this time I eventually getit right. By the end of the month, and the endof my four­week trial, I’m just short of whereI started.

It takes some kind of incompetence to goshort during a market rout and still losemoney. But I’ve learned some valuablelessons and am newly convinced of themerits of CFDs. Were I to start from scratchwith real money, having learned about thepitfalls, I think I’d do reasonably well.

PostscriptSince the money isn’t real, I don’t close outthe trades on the day I stop trading to file thisarticle. I see what they’re worth that day,take that as my closing balance, and leavethem. Two weeks later, out of curiosity, Iopen the system again. The markets haverallied and all my capital has been wiped out.

Of course this isn’t real, as in reality Iwould have closed the positions when Iwanted the money. But it’s a cautionary tale:never leave your positions unmonitored! Si

SO WHAT HAVEI LEARNED?n Spend a month paper trading!

You may think you know whatyou’re doing with a new systembut you’re very likely to find acouple of areas along the waywhere you’ll misstep becauseyou’re unfamiliar with theprogram and its processes.There’s no harm in taking a fewweeks to get to know the ropes.

n Know your strategy. It may be,for example, that you want CFDsto hedge your stock exposure, orto take a position on particularasset classes where normally youcan’t get exposure. But don’t justdip in and out like it’s a sweetshop – know what you want todo and execute your plan calmly.

n Stop­losses are great. It would berash to use CFDs without them.

n But be careful where exactly youput those stop­losses. On threeseparate occasions I took aposition that, within a week, wascorrect but still lost moneybecause my stop­loss was hitduring volatility.

n Be sure your understanding ofleverage, margin and exposure iscorrect. This is another thing Igot wrong to my (theoretical)cost, taking much moreleveraged exposure on a foreignexchange position than Iintended to. No harm done inpaper trading – that’s what it isfor, to iron out the bumps – butyou wouldn’t want to make anerror like that in real life.Leverage on FX contracts can bevery, very high.

48 | afrsmartinvestor.com December 2011