Double Blind

There is a video going around the internet of a guy who calls himself “High Probability Trading”. As the markets were crashing last Monday, he lost about $25,000 on a single trade involving Dow futures. You can watch the video here (WARNING: there’s a lot of swearing), and you can visit the guy’s website here.

I think he will take the material offline after a couple weeks since it is really compromising. (Update: He removed the video the day of this posting… oh well, that video was one for the books, that’s for sure).

(Update again! Some guy mirrored the video and posted it here… once again, profane language warning!)

A simple analysis of the situation is as follows: He is trading Russell 2000 (an index that consists of the 2000 largest companies trading in the USA) future contracts. They are based on the value of the Russell 2000 times 100. For example, if the Russell is at 650 then if he buys a contract, and the contract goes to 660, he will be $1000 up if he sells at that price. Likewise, if the Russell 2000 goes down to 640, and he sells at that price, he will be down $1000.

So the guy bought 10 contracts at around 678 last Friday before the close of the market. When the market opened (at least around the world, the markets in the USA were closed but the future markets were open), the contract went around 653, and he was facing a $25,000 loss (which you can see on the video).

This is a pretty important video for traders out there to watch, as it is a textbook example of what not to do while trading. For example:

He leveraged too highly. His account equity was around $48,000 and he was buying 10 contracts. So for every percentage point the contract changed, he would have had a corresponding change of 14% in his portfolio. Reasonable trading practices would suggest that he expose himself to one, or at most two contracts of this type, which would result in a 1:1 or 1:2 leveraging to the corresponding index. This by far was his biggest mistake. Such strategies look really good when they work, but when they go against you, you will not have any capital left to perform with.

He did not place a liquidation stop when the futures market opened on Monday. He let the market ride out his losses. According to his site, he eventually liquidated for a $30,000 loss and this took him down to about $18,000 in account value. Even if he placed a stop he would have substantial losses. (Update: On further reading, he could have gotten out with a $7,500 loss, so yes, this was a huge error on his part… he should have liquidated while he still had the chance since there was a liquid market for him to dump his position)

He learned this lesson the hard way – fortunately I never had to, I had people like this to learn from. His postmortem is quite good.

I am currently up year to date.

This entry was posted on Tuesday, January 22nd, 2008 and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.