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.