Chapter 1 - A trader is born
Revised: Feb 25th, 2019 V1.0
How to lose money when trading
Introduction
The idea of these articles is not to make you the ultimate trading machine. Only a few are and will
ever be. The idea and intention here is to help you avoid the most common mistakes that either
make you lose some or all of your savings. In worst case trading may put you in debt. Becoming a
winner is very much like evolution in nature - you learn from your mistakes. The stock market is full
of predators just waiting for newbies they can feed on. Stocks may be subject to “pump and dump”
where news is pushed to press the stock up while major players sell, or the other way around.
Another common way is for professional traders to fire up a rally in illiquid stocks and let small
traders lose as they get in too late and get out even later. These events are known as “the penny
stock runs” as they mainly happen in penny stocks with very low daily trading. These runs are often
initiated by stock forums spamming where the initiators of the run pump rumors or otherwise create
attention to the stock just after buying shares. However, the main reason so many investors lose
money while trading is due to lack of knowledge and access to information.
I will bit by bit introduce technical analysis in this text as I believe this is a tool any trader should
know. Technical Analysis (TA) will help improve your timing and ultimately help you make better
overall trading decisions. In the end, it all comes down to decisions, and in the stock market, there is
very little room for error unless you have proper stop-loss strategies.
Yours,
2|Page
Table of Contents
Chapter 1 - A trader is born ..................................................................................................................... 4
Getting into stock trading is easy ........................................................................................................ 4
Accepting the facts .............................................................................................................................. 5
Market situation .................................................................................................................................. 6
What goes up eventually go down .................................................................................................. 6
Start with getting a proper broker ...................................................................................................... 9
Try to stay away from CFDs until you are ready ............................................................................... 11
The bad spread .............................................................................................................................. 11
Flushing positions .......................................................................................................................... 12
3|Page
Chapter 1 - A trader is born
To become an ultimate trader is a journey, an
evolution from buying on pure luck to buying and
selling on facts-based decisions and great
knowledge. Only a few will ever reach the top level,
but a lot of money is to be made and saved by
having a minimum knowledge.
Getting into stock trading is easy
Most new traders start because somebody is telling how easy it is to make money in this market. It
may be a class friend, a news article or an “expert” advice on TV or radio. Usually, most new traders
enter markets in the late stages of a long upturn when newspapers start to write how much you could
have made if you played the markets. To me, the ultimate sell signal has always been when “trading
and stocks” appear in the gossip magazines. By this point, the professional traders have already
downsized their portfolio and prepared for the bear market.
Lately, the Bitcoin and other crypto currencies have been booming. Some people have been lucky as
they were hitting the uptrend. Their profit was caused not because of the insight or skills, but by pure
luck being at the right place at the right time. Because of this - tons of “experts” appear. They can
explain and assure that the only way for cryptocurrencies is up. The fact is that a true “expert” has
been in volatile markets or even seen the dreadful bear-market where people lose their homes, their
businesses go bankrupt and fortunes are lost overnight. These are very hard lessons, but the best of
the best makes even more money in falling markets.
Since most traders enter the market looking for the easy money promised, the disappointment is huge
when first losses are a fact. There are always many excuses for the losses, but in most cases, everybody
blames others and not themselves. From this point and forward in your trading there are no excuses.
You and only you are the one making decisions. If you manage to accept this simple, but so powerful
fact, you will be ready to move on and become a better trader. It is all about the decision, whether it
is investing in a fund where professionals handle your money, or it is day trading.
Take responsibility for your actions to learn from them.
4|Page
Accepting the facts
Nature is cruel, it is not soft like humans. It doesn’t spare the weak and only the strongest survive.
Nature is as close to perfection as it is possible to get, and it has taken billions of years to achieve it.
To make you a “perfect” trader in 5 minutes or 2 months is wishful thinking, but while nature learned
it the hard way in millions of years of evolution, humans can learn from evaluating history and each
other.
Given the fact that nature doesn't have options as we humans have, it is per definition easier for nature
to make decisions. Nature is a beautiful 0 or 1 algorithm. Nature is the divine script all programmers
dream to create. In fact, as a trader, you should strive to become more like nature. Weak stocks do not
belong in your portfolio. Weak decisions should not exist. Words like “maybe” should not be in your
vocabulary. There is no such thing as “maybe a good buy” or “maybe I should sell”. Having a weak
stock, making a weak decision or having "maybe" in your vocabulary is a guaranteed way to lose
money.
Some long timers may tell stories about stocks doing marvelous turnarounds. Yes, even I have sold
stocks just to see them re-bounce to the sky. However, what most people fail to see is that for every 1
stock doing it, 9 will fail. In trading, you want to be more than 50% correct. That is where you’re making
money. Not by being lucky.
But let us jump back for a second. I started by saying that most traders enter the market in the late
stages of an up-trend when even the gossip magazines are recommending stocks. I then said that your
first decision is to be responsible for your actions and the only person to blame can only be yourself.
Furthermore, I said that as a trader you should strive to become more like nature. I pointed out that
weakness will make you lose money. If you have invested in stocks or Bitcoin you need to understand
that you’re in the predator’s market, and only the strongest will survive. I will now try to exemplify the
first two parts of this text before moving on.
Know where you’re from to know where you’re going to.
5|Page
Market situation
You have entered the market and you are making trades. But do you really know anything about the
market you have entered? Do you know what part of the market cycle you are in? At the beginning
of a bull market, you can put your money on almost anything and hit a bullseye. Crypto currencies
are the most recent example of this. But in the end, it is almost impossible to win, and losses will be
more common than profits. Everything moves in cycles, short, medium and long term, and bear
markets have been as certain as bull markets. If you are totally new to trading, bear market is a
falling market, while bull market is a rising market. All you really need to know is that whatever goes
up, in most cases comes down. There is plenty of Bitcoin owners that have seen a super profit on
paper being reduced by 50% in less than 1 month (Dec 2017 Bitcoin fell from USD 19.900 to USD
10.000 in just a week).
If you understand in what part of the cycle you have entered the market it is easier to make good
decisions and understand why good trades, go bad. Anyone entering the US stock market now is
entering a market that is overbought on short to medium term. In
fact, the market is now defying gravity which will just make the fall
harder. In euphoric markets volatility is high and stocks behave
erratically - with strong gains and strong falls, often within the same
day. For a very disciplined trader it is perfect market, but for most it
is a rollercoaster ending with huge losses. Why roll the dices?
What goes up eventually go down
Below is the chart of the Nasdaq index as it is right now when these articles are being written (Jan
2018). The red line at the end indicates that the index is overbought on the relative strength index
(RSI, which will be introduced in more detail later). But just imagine there are 100 traders when more
than 70% are positive you should be warned that too many traders are positive. At StockInvest.us we
color our charts red when RSI goes above 70%, and we color green when it falls below 30%. The logic
is that when everyone is positive the next person will be negative. At the very end of overbought, all
credit cards are maxed out and everyone is in. There are simply no more buyers to push it further up.
6|Page
Any investment made now will have a higher risk than the investment made at the beginning of
2017, and extremely riskier than investments made in 2011. This does not mean you should not
invest, it just tells you that you need to treat your trades differently.
“Personally, I have more than 50% of my trades invested in shorts, which is a bet that market will fall.
I also keep a higher stop-loss on my stocks due to the high volatility. My trading horizon is also way
shorter as I don’t want to get stuck in bad positions. I avoid investment in ill-liquid stocks like these
can fall drastically from one day to the other. Neither do I sit 100% in market overnight or weekend. I
always keep some cash available so I could act on good trades. It also lowers my general risk. “
7|Page
To give a better understanding of why it is important to know what part of the market cycle you have
entered, it is better to look at the Nasdaq history from a longer perspective.
By looking at everything in perspective it is easy to imagine that the next step ahead will probably be
a fall. But remember that “experts” promised a huge stock fall back in 2015, and for sure when Mr.
Trump won the election. I have still to see a perfect algorithm or a perfect “expert” with perfect
timing. The Nasdaq exchange may easily go up to 10.000 points because at this stage anything can
happen, and it will happen fast. Up as well as down. This is the volatile part of the market cycle which
is perfect for the disciplined trader.
If we look at the Bitcoin chart: the huge fall lately seems logical just by observing the chart. However,
I am not sure if the worst part is over yet. The reason for this is the lack of real support before USD
5.000 range. But that is another discussion.
8|Page
To sum up, you are responsible for your decisions. You need to know where in the cycle you are in
all trades and in all markets. This will put you on top of the situation, and not leave you in darkness. I
have said it is a predator’s market, but not explained it in detail, but we will get to all that in a
minute. If you still believe others are to blame for your trades, then you have just wasted your time
reading this chapter. In the next part, I will be looking at some basics
If you hesitate you will be eaten alive.
Start with getting a proper broker
As I mentioned earlier, most new traders get in the game late and are usually driven by a desire to
join the train to riches. In many cases establishing a trading account is done on impulse without
doing proper homework first. Often it is done by following a link from a web commercial or by
referrals from a friend. Setting up a trading account is easy, and first trades are often done without
even knowing exactly what was done. Getting an account usually requires some online forms, a copy
of a certificate and then adding some cash to the account. Once the account is established a blue or
9|Page
green button will let you buy. With a single click you’re in the game and instantly you have affected
your future. I don’t know how many people have approached me after losing huge amounts of their
savings by doing all classic mistakes. I am no exception.
There is a huge variety of brokers out there. As a new starter or even a professional you should
always seek brokers that offer you to trade directly from the exchange trading books (broker is
directly connected to the main exchange). This will make sure you are trading on the actual market
price and can take advantage of the full trading range (also known as spread or difference between
highs and lows). This is very important, and especially if you are day trading. When day trading minutes and often seconds matter. You do not want a broker who provides delayed prices. You want
to get in and out of trades in real time.
Another important thing is to know that there are fees to trading. Working with a serious broker you
should be able to do a USD 20.000 trade for as little as USD 2-3 in total fees. Some brokers will tell
you that you can trade for as little as USD .50, but what they fail to mention in the headlines, keeping
in small notes at the bottom, is that you’re not getting the market price on your trade. It is a huge
difference buying, for instance, Apple at USD 177.50 and USD 178.20. The USD .70 difference may in
many cases be the entire spread of the day.
In these modern days you would prefer to use an online broker that offers trading both from web and
from application. In many countries proper online brokers derive from banks or well-known trading
houses. Most banks do offer trading from your bank account, but often with bad interface, high fees
and lousy market coverage (number of shares you can trade). Ideally you want a broker who offers
several markets, that is more stocks to trade on. This will give more options and reduce the overall risk
as more markets open for diversification. For instance, there are only a few hundred stocks listed on
the Oslo Stock Exchange (OSE), while there are almost 2.800 stocks on New York Stock Exchange
(NYSE).
As a foreigner you can, with some hassle, get a trading account at the American broker TD
Ameritrade. Once your account is established you can enjoy the lowest fees and most accurate
market prices for the US market. The point is, that in the end, this will allow you to make money on
even 1% day spread. And this is where the money is.
10 | P a g e
It is better to spend a day extra doing things properly, than regretting for years
Try to stay away from CFDs until you are ready
In most cases, new starters join a CFD broker (Contracts For Difference) and while it looks like they are
trading real stocks - they are not. CFD brokers offer margined contracts on financial products (stocks,
currencies, cryptos etc.) and according to a recent article 74% of all CFD traders lose money. This is the
main reason why it is so important to understand what type of broker you have and being able to
compare this broker to the alternatives.
Some will argue that CFD brokers are very good as they offer leverages (trading where you only put in
a small amount of the total trade and therefore allow small investments to take large positions). For
example, you can put in USD 150 and the CFD broker will put in 20x, making your USD 150 investment
worth USD 3.000. But there is no free lunch in the stock market, and for sure not in the world of CFDs.
Usually, it will take some losses to understand.
When it comes to CFDs the very first trap is the high spread between sell and buy. The second trap is
the deviation from the actual trading price for the security (at the exchange where the stock is listed).
Let us analyze a real example. Imagine you want to buy Apple [AAPL] that it is traded for USD 178,25
at Nasdaq stock exchange and you are using your CFD broker. In most cases the CFD broker will do two
things:
The bad spread
It will give you a very bad spread meaning it will be a huge difference between buying and selling price.
In the case of AAPL, the CFD company will offer you to buy AAPL for USD 178.64 and sell it for USD
178.25. In this case, the spread is USD .39 or 0.22% between buy and sell, which is far higher than at
the actual exchange. In simple words, it means that AAPL will need to rise 0.22% before you will break
even.
You may think this is not so bad, but in most cases, the spread is larger and there may be a transaction
fee involved. If you decide to keep the position overnight, you will be subject to more fees and so on.
11 | P a g e
Forced leverage, in this case, 1:20, means that you put up
money for 1 stock and the CFD will lend you the cash for 20
more. For USD 1.000 you can hold AAPL stocks for USD
20.000. This may sound very good as you get more exposure,
but unless you have enough cash to cover sudden changes it
will keep you on an unwanted leash.
To make it worse most CFD companies also lag the price in the
wanted direction. If the stock goes up - the price at the CFD
broker moves slower up, but instantly kick in on a price drop.
This means you will never be able to get optimal trades hitting
the exact bottom or top. I have seen the difference in lag
reducing an actual trading range (bottom-top) of 7% on the
exchange to be only 3.5% at the CFD broker. This simply
means that you could lose 50% of the potential profit. I assure
you that they will increase your loss if they can. The reason is
very simple. While at proper brokers you buy a share, you
only buy a contract for a share at CFDs. It is in their interest that you lose as your money then will go
straight into their pockets.
Flushing positions
The other major thing CFD companies do, and especially for currency pairs, is flushing positions. Huge
algorithms keep track of how many positions can be closed by pushing or dumping prices. To avoid
legal conflicts the buyers and sellers are not associated with the actual companies, but the money
derives from the same sources. There are reasons why most of the CFD companies are registered at
Malta or similar countries. It is all about mathematics. If a position is closed, you lose your
investment. If closing your position costs less than what can be gained, it will always be lucrative.
This game which is played by all major players is known as “pump and dump” and comes in all
varieties in any kind of financial instrument. Very often these actions are followed up by the news to
increase the effect. The market is indeed for predators and this should always be in the back of your
head. Personally, I love to pray on “pump and dump” as these can easily be detected, and the
pattern is very predictable.
You may ask why I don’t recommend avoiding CFDs totally. The answer to this question lays in the
huge leverage they offer. If you are willing to pay the price and know the risks, then CFDs is a way to
12 | P a g e
access more capital for your trading. Nevertheless, CFD broker should never be your main trading
source.
A good start is everything
13 | P a g e