From my trading life

I want to share some episodes that I have experienced throughout my time as a financial advisor, in order to supplement what I have written in this journey so that I show you something real after so much theory.

It was 2008, a dark period for stock markets. I told my clients to sell STMicroelectronics; a stock quoted not only on Wall Street but also in the Euronext (Paris) and Milan stocks market. Behind this advice there had of course been a whole series of considerations that triggered this sales signal. The entry price was at € 8.30, and the stop-loss would have been achieved in case of a daily close above € 8.60. The target price was € 7.50.

Immediately after we began trading, STM fell, but after a short time, once it had touched 8.21, there was a reversal of price, with the start of a sideways phase in the area of 8.40/45, for roughly three hours. Around this time, one of my clients contacted me to ask: “should we close STM?” I answered him by saying that, since neither the target nor the stop had been reached, and because the initial conditions had not changed, there was no reason why he should close the operation.

The fact is, after a handful of minutes, the client wrote back to me to say that he hadn’t trusted the stock, and thus had closed the operation at 8.42. In his eyes, the stock would have continued to rise and would have stopped at a higher level than the current one, with a far more significant loss. The moral of this story is that, in little more than one more hour of trading, STM went back down, with a close that matched the opening price of 8.36. Three days later, the stock reached its target price.

Of course, you are probably thinking: “with hindsight, everything is easier... but what if STM had continued to rise?” In that case, the stop-loss would have been triggered, and good riddance. Losses are part of trading. The most important aspect that this episode teaches us is that staying anchored to our plan is crucial. We open an operation because certain considerations give us the signal that we should.

What you saw is a classic example which proves that we should always trade (and manage our positions) based on what we see and not what we think. I do not love automatic trading systems, not because they are not valid methods of earning money in the financial markets, but because I think the human mind, in some respects, is better than a machine.

Trading systems, however, have the virtue of never being conditioned by emotions or ideas, rather they execute operations as planned, and without any hesitation. In the above case, a machine (a computer) would not have asked the question of whether or not it should close that trade in advance or not. It would have continued to follow its “algorithm” until the end. This is how a trader’s mind has to work as well.

The next episode also happened in 2008 and concerns Forex, more specifically the currency pair Eur-Jpy.

My client wrote to me, asking for my opinion about a short in Eur-Jpy. The entry-level of the strategy was at 144.700, a few pips below the low of the previous day. A trade that I endorsed because I really enjoyed the idea of investing in the Japanese Yen, a safe currency (together with the Swiss Franc) at a difficult time for the financial markets (as well as world stock markets which in 2008 were also facing troubles).

In response to the question of where to insert the stop-loss I indicated a level at a distance of about 2% from the market entry (at 147.700) that, if reached by the currency pair, would probably have pushed Eur-Jpy to a higher price (Back then, stop hunting was not as exasperated as it is now).

After a few hours, my client wrote to me saying that the price had reached the stop-loss. I was surprised; at first, I thought that maybe an anomaly had occurred on my platform because it gave me a daily high that was far from the stop which I had indicated.

I asked for explanations from my client, who replied that he had not placed the stop-loss where I had indicated, because a price at that level would have completely blown his trading account.

When I say that you have to establish everything before opening a position, I mean absolutely every aspect, starting from the maximum loss you are willing to suffer, and, as a consequence, the position size you are going to open, based on the stop loss. I say this because it really is the only way to trade properly, and to survive losses.

But not just this, it is also important because it ensures you avoid throwing away good gains. If my client had been less greedy and had opened an appropriate position by following proper position sizing, he would not have closed his operation with a loss, but with a strong gain. Eur-Jpy collapsed from the entry-level the following week, by more than 10% (low at 132.240). The currency pair never came near the stop-loss level I had indicated.

Placing a stop-loss that is too close to the market entry is flawed because, in most cases, it will be hit. Obviously, this will always depend on your trading strategy, but if the loss is substantial for your trading account (like it had been for my client), then there is something in your trading is working incorrectly (you now know this, having reached the end of my book).

The next episode dates back to 2011, my last year as a financial advisor. My client wrote to me, saying, “David, you are wrong about Mediolanum (an Italian bank), you should not open a short-selling, rather you should buy shares. The CEO has just been interviewed and, as he explained, prices will rise to € 5.00 in the next few weeks, (its quotation was just under € 4.00). I have bought 5,000 shares, and if you are cunning, you will do the same.”

I have never been cunning, but thankfully, I am pretty wise. I continued to follow my analysis and sold Mediolanum, confirming my advice to my clients that they should keep selling shares with a target of € 3.40 and later € 3.00 and € 2.60. The stop-loss was € 4.20.

To keep things brief, after a few days of price laterality in the € 3.90/4.10 area, Mediolanum collapsed, reaching not only all three target prices but also touching a low of € 2.00. Since then, I have not heard any news from that client.

Often who speaks, and who writes, makes it for getting an advantage. Do you remember more recently when Goldman Sachs claimed that crude oil would end up touching $ 180 a barrel? Or that time in 2016 when they state that the Eur-Usd would achieve parity by December? Did any of you follow those “tips?” Personally, when I read about Eur-Usd, I said: okay, the time has come to convert my trading account from US dollars to Euro.

Read all the newspapers and web pages you want, watch and listen to all the broadcasts you like, but in the end, always think with your own head, not those of others. Always follow your analysis and plan. And then, if you’ll allow me a small joke: if you really wish to close a trade at a loss, you do not need the advice of experts on TV, you can manage it very well on your own.

From these examples, another aspect that comes out is the importance of keeping a journal. I have always done it, and it has been beneficial to me. Retracing your steps and analysing your mistakes will help you grow, allowing you to become a better trader.

I close with an anecdote. Several years ago, there was a trader at Wall Street who, with a can of Coca-Cola, had built a kind of radio. He said that through it, he communicated with some not-well-specified inhabitants of space, and they told him which shares to buy. When an operation went badly, he blamed interference, caused by waves in space that led him to understand the wrong indications.

You might not believe it, but this person was able to earn money every month. How? He always used the stop-loss. Stop-loss is a parachute that always makes you land on your feet, a life preserver that keeps you from getting to the bottom.

I see the stop-loss as car insurance: it is necessary for avoiding more trouble. I do not think anyone is happy paying for their car insurance. However, when a crash occurs, everybody blesses their insurance stipulation. The same is the case for the stop-loss. When it is reached, everyone curses the markets as manipulators. But then, when they see what their loss could have been without it, they are happy they inserted their insurance policy “stop-loss” on the platform.

This anecdote merely shows that more than a good strategy, in trading it is fundamental to have discipline and respect for the rules. You have to take care of every small aspect, always following through with what you planned, without exception.

There is no secret to becoming a successful trader, it is all down to hard work and discipline. Put what you have read into practice, and track the improvements, both in terms of results and the quality of your life.

I would like to point out that, since 2011, I no longer work as a financial advisor, and I also no longer teach courses anymore. Please do not ask me for them. I am not rich but I do not need money either, what I earn from trading is more than enough. I prefer to live a life I love, with the people I love (which is part of my life plan).