My account might be in trouble: What now? (PART 1)
There could be many reasons. Let me eliminate a few nonsensical moves which beginners pull off – those can’t be helped anymore.
1) Extremely high leverage; You have more than 25% of your account banked on a single trade which has gone against you, whether a commodity or a stock. This is difficult to come back from since you are staring at possible margin call in case the trade continues going against you. Mistake made, cut loss and learn the lesson.
2) Many trades on a single stock or commodity; This is the opposite of diversifying your risk, piling it all into red or black (casino lingo), this is where you are gambling rather than trading or investing. Diversify your risk next time, it dilutes your potential profit but it is crucial in managing your equity and account life.
3) Broker has issued you a margin-call; This is the worst case scenario where the broker has reached the limit of trading opportunity, and are at risk of losing money themselves. This happens when they need to protect themselves and will issue margin call by cutting your trades (loss or gain) in order to ensure no negative balance/minimal loss to your account.
Btw: If you are using a broker which does not guarantee ‘no negative balance’ trading… it is time to review your choice of broker
Now, onto the fun stuff. Let me put forward a case of proper risk management, turning your loss into profit while making new trade(s) at your current predicament. Let us take a case study:
Oil: This commodity move in tandem when there is risk of war. The recent Iran vs USA drama in early January got my belly in a knot when oil spiked up big league and I had a few sell calls on oil. Thus, I was losing quite a bit of cash and it was not pretty. Keep in mind though, my running loss equated in oil trades equaled to around 9% of my equity so margin calls and losing my equity is not a concern at this point, I am simply looking at turning a bad situation into a manageable one. Take into account this is for a small equity of about $1500 so the damage could become significant.
The 3 red dots (Ref to image above) represent SELL positions. Take into account we have a SELL LIMIT at the top which frustratingly, had failed to engage! All part of the game though.
The 1 green dot represents a new BUY position. This is a conundrum which has befallen many day traders, and things start to get ‘messy’.
Now, this account is at a bit of a risk due to few sell positions with threat of war pushing this commodity up very quickly. How far can it go? Would it reverse at all? If we get into a full blown war, could the price shoot past $75 per barrel? Maybe even above $85? Absolutely.
Thus, the single buy call is made to protect at least 1 sell. Notice we have a total of 0.04 towards sell, with 0.01 buy now. I am still biased downwards. I still trust fundamentally, oil must head downwards from here. Why do I believe this? That’s another topic you can explore.
However, this buy gives me a safety which protects 1 sell position at least. If oil spikes up to even $80, I am fine with it since I can cash out on some good profit. However, a major reversal is due at some stage from 80 and I can go big on sell calls.
The risk mitigation plan is clear, so what happens next?
END OF PART 1