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I’m happy to admit that I am an emotional person, which isn't the best trait to have for someone who is into personal finances, but this situation would have been gut-wrenching for anyone.
The date was April 20th, and I was invested in oil using CFDs (basically betting on stock movement). You might have seen the news stories at the time about the price of oil in America going into negative, and then from $18 to -$37 a barrel. The basic reason for this was when countries went into lockdown due to Covid 19, there was a massive oversupply in oil, so the prices plummeted before rebounding. If you want to find out more info on this you can go to Investopedia (https://www.investopedia.com/articles/investing/100615/will-oil-prices-go-2017.asp)
Now, you might think that if I was heavily invested in oil that because of this crash, I lost most of my stock value, however, this wasn't the case. In fact, I was actually shorting oil. Shorting in simple terms is placing a bet that a stock will go down. So why did I end up losing money? Here’s a step by step as to what happened.
I was shorting oil, and as news broke, I sold other investments to increase my short position. At this point, my stocks value was at around $2200
I decided to run a 10X multiplier, which meant if a stock went down by 10%, I would have actually made 100%.
I went from $2,200 in value to around $7,500 in about 2 hours. At this point I cashed out and pocketed all that money. All good so far!
Then, as oil continued to drop, I decided to put all that money back in to try ride the wave further.
To get to this point I had set a 50% stop loss and a 100% stop gain, This meant that every time my stock doubled in value, it would cash out that stock and credit me with the money. Vice versa, if a stock lost half its value, I would be cashed out.
Here it's worth explaining what I didn't understand at this point. What I hadn’t appreciated was how the multiplier would operate alongside the stop losses in a highly volatile trading situation. I would only have to see a stock rise by 10% or fall by 5% to be cashed out. In this case, as I am shorting oil, I wanted it to fall by 10% and not raise by 5%.
The stock plummeted and kept falling, but as it got lower and lower, it started to have little spikes of correction.
This meant that as my stocks started to stabilise it would only need to rise by 5% before it cashed me out and I lost half of my money. For instance, at $10, if it went back up, even for a nano second to $10.5, I would be cashed out and lose half my money.
As it was corrected I started pouring more and more money in to try and chase my losses.
The downfall had started and by the end of the afternoon, my total stock value was at around $1600
I ended the day with a potential loss of $5900
Of course, I was gutted. I am more than willing to admit that I was not right for a week after the incident, knowing that I had fallen prey to something that I didn't fully understand. In fact, thinking about it now makes me feel a bit sick.
So, here’s what I learned.
I will not mess with 10x multipliers again. It is adding so much more risk that the potential losses could not be worth it for most people.
Do your research. If I had looked into multipliers before jumping in this wouldn't have happened.
Manage stop losses effectively. Another way I could have avoided this is taking off a profit stop gain. If I had, as the stock corrected, it would have only eaten into the profit I had made and not cashed me out at a gain of 5%. This however doesn't mean I would have kept the money. I could have tried to hold all the way back up to the correction and lost the money anyway.
Trading isn't for everyone. After this I pulled massively back from day trading, it doesn't suit my personality. It can be great for some people, and I don't deny that it has made some people very rich. But, the average Joe, like myself, does not have enough time or money to really make day trading a viable investment method. If you are going to do it, please do your research and make a decision with a cool head. I also recommend not logging you profits and losses in your finances. Treat the money as if it's already lost. If you do, you can limit your disappointment and any gain can be viewed as a bonus!
Thanks for reading, I’d love to know your thoughts, so please feel free to drop a comment.
Disclaimer
I am not a financial advisor and opinions on any of the forums or blog posts are also not financial advice. Users should not rely upon this information to make financial decisions. All invested capital is at risk from fluctuating market trends. Refer to all terms and conditions of any credit, investment or banking account before submitting an application. If you have any doubts about anything stated on this site, you should seek advice from an independent financial advisor as I cannot give personalised financial advice.
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