I recently had a chat with a beginning trader who had just entered the forex trading world, had opened up an account and was eager to place their first trade. He was interested in what I was trading, what positions I had on, etc.
I then went into my global macro analysis of the situation. I tried to explain why I was bullish on the New Zealand Dollar and the Canadian Dollar. I was trying to explain the potential for a rise in interest rates coming from some renewed growth. I was attempting to explain why this would generate bullish order flow for those commodity currencies. I was attempting to explain the market’s expectations, etc. I was attempting to explain why I thought risk appetite was going to increase. I was trying to explain why I thought the stock markets were going to head higher and why I thought commodities would head higher.
But this trader was not interested in any of that. He just wanted to know what positions I had on. He just wanted to know what to buy and sell. He just wanted a hot tip. I tried to wiggle around it. I don’t like giving any trade recommendations, because I can turn around and within a few hours completely reverse my trade and leverage up in the other direction if the market conditions change. Most people don’t have that flexibility. I refused, but eventually I told him that I was long NZD/USD and short USD/CAD. This conversation was on Monday evening, July 18th.
The conversation ends and I go on my merry way.
Turns out, both the New Zealand dollar and Canadian dollar appreciated over the past day or so. I get a message from this same trader telling me that he was up over 20% paper profit.
I figured out that in order for you to be up 20% on such a move, you really had to leverage up. The beginning trader I had talked to the day before had leveraged up on my trade recommendation. Now, I had no control over that, it was his own decision. I can’t position size for someone else’s account. That is their responsibility.
I wasn’t sure what to think. On the one hand I tried to explain my reasoning to him, so he can learn a bit about the global macro environment. I tried to explain the market environment to him. I gave him a trade recommendation that turned out well, at least for one day. The person was up 20%.
But on the other hand I don’t know how he has his stops positioned. Is he even using stops? How will he manage the exit strategy? Does he even have an exit strategy? Is he leveraging and pyramiding on the way up even more?
All those questions are already answered in my own trading plan and account. I have already completely accepted whatever risk I took.
In the end, I may have helped to give this beginning trader a nice win to start off the account, but will this trader eventually learn the crucial skills needed for long term success? Can the beginner trader handle the inevitable setbacks and psychological pain? Only time will tell. But I wish him the best of luck.