Fred eventually went home and things returned to normal. A few days later I get one of many calls that were to come from Fred.
"Hi buddy, I set up my account last week and it's live today."
Great I said. "Remember to take it easy."
"Its a bit late for that me old matey, I'm short the Swiss for a million."
I just listened dumb stuck. You could and still do get incredible leverage with Forex. In those days there were no such things as mini contracts. I had just started trading with two contracts and here was Fred on his first trade, jumping right in there with ten contracts.
How big is your stop I asked him.
"Stops are for wimps buddy. When I make a couple of grand I'll close the position." "Listen Fred, that's dangerous.""Don't worry me old matey. You can sit up there in the Highlands and watch the grass grow while I make the real money down here."
About three hours later he calls again. "Just made $5000 bucko. Put that in your pipe and smoke it." I laughed but I was worried about him.
A few days later Fred calls again. "You wont believe this. I was going to short the Pound so I went short 30 contracts and went out for a coffee.
Anyway, when I get back you will never guess what happened. I screwed up. I pressed the buy button instead of the sell button and now I'm up $15,000."
I had also been trading the Pound and there had just been a nice move but I had made about $1000.
So what are you going to do now I said. Are you going to close the position? "Hell no. Push it until it hurts me old matey".
He eventually closed the position later in the week and was up about $45,000. Over the course of the next few weeks Fred made about six trades and was increasing his leverage as he went. He was now regularly trading 30 contracts plus. After about a month and a half his account was standing at $500,000.
Quick Explanation
The pip value varies depending on which currency pair you trade but lets say that a pip is worth $10 with one contract to make this easy. Fred was trading 30 contracts or about $300 a pip. If the pair moved 100 pips that would be $30,000. Contracts in Forex are also commonly known as "lots".
Back to our story. It didn't matter how much he made he wanted to use the maximum leverage he could and push his leverage to the limit. It was madness but no amount of reason was going to stop him.
He had also had a remarkable run. I don't remember the exact number but he had very few losing trades.I was getting more worked up about his trading than he was. I eventually couldn't take it any more and told him I was flying down to see him. I was also curious to see how he was doing this. What mad method was he using. As it turned out, his method was remarkably simple. Look at this chart
Basically at around midday he would just draw a straight line across the top and bottom of any consolidation he could see on a 5 minute chart. If he had a couple of closes above the consolidation he went long. If he had a couple of closes below the consolidation he went short. There was either no stop or one so far away that it didn't matter much. He just closed the position when he felt he had made enough or judged the market to be turning on him. It was a sort of breakout technique.
Things came to a head when Fred went on holiday. He didn't particularly want to go on holiday but he had arranged this months before him started to trade. He had arranged to take his family to Disney Land and off he went. Finally I thought, some peace and quite. But not quite.
He could only have been on the ground for a few hours when I got the call. "What's the Yen doing." Forget it I said. You need to take a break and spend some time with the family. Silence on the other end of the phone.
A few hours later he calls again. "Right me old matey, I've just bought a fax machine, fax me over a chart of the Yen." I couldn't believe what I was hearing. He wanted to trade without a dealing station and no access to charts. "No way Fred." "Listen up buddy, I am going to take it easy, I just want to be in the market. Send me a 5 minute of the Yen and I will keep it to ten contracts." Reluctantly I agreed but made it clear I thought he was off his head.
I knew that regardless of what I said he would find a way to trade.
As it turned out, even on his two week holiday he made over $100,000. Obviously going over his 10 contract limit he promised me.
I could go on here about his trades but the incredible run finally ended one Sunday night after about three months and around 40 trades, Fred had managed to parlay his initial starting capital up to one million dollars.
Now if you trade currencies, you know that nothing much happens on a Sunday night. Asia opens but generally there are no big moves.
The phone rings about 1 am and wakes me from my sleep. "What the F%$* is happening to the Swiss." He didn't even wait for an answer, he just hung up. I lay in bed for about ten minutes thinking about what Fred had said and then curiosity got the better of me, I had to go see for myself.
I knew as soon as I saw the chart what was worrying Fred. For some reason the Swiss had gone up over 100 pips on a Sunday night. I had never seen such a big move on a Sunday and I couldn't find any news as to why this might be happening. Fred must be short the Swiss I reasoned.
I decided to call him. "Your short the Swiss right?" yes, he replied. "I just don't understand it. I thought I would place my positions ahead of Mondays opening and then this Sh*% happened. What do you think I should do?"
I didn't know. "Look, you really only have two options, close the position now or wait for the London open and see what happens. Whatever you decide put a stop in to be on the safe side."
I remember watching that 5 minute chart of the Swiss all night long and about eight am London time the Swiss began to rise again. It had moved another 80 odd pips up. I called Fred. "What did you do." Silence on the other end of the phone. "Fred, what did you do."
"I shorted it again. I thought that as it had already moved so much it must be ready for a pullback so I shorted it again. There is something else Mark but I am too embarrassed to tell you." "What is it Fred?"
"I've been adding contracts and now its looking real shaky."
I never did find out exactly how bad his situation was that day but I could guess. Not only had he shorted the pair again he had added contracts.
After that trade, nothing seemed to go right for Fred. He had some wins but in a period of about a month he lost everything. Even his starting capital. He was the first trader I knew who actually had a margin call. That's when the broker calls you to tell you that there is either not enough money in the account to cover the position or it is getting dangerously close to that level.
I still consider Fred a close personal friend and we have remained friends throughout all the years. It took some time but Fred to recover but he did eventual make quite a bit of money in the property game.
Here's the moral of the story. I have met some incredible traders over the years. I even know one trader who makes millions of dollars a year and before you ask, no, he doesn't share his method with me.
Of all the hundreds of traders I have met over the years I only know a handful that still trade and make money year after year. All those traders without exception have strict money management principles and a simple method or system.
Don't be in a rush to make it in trading. You need to learn this profession. You need to have money management principles in place that allows you to stay in the game even when you go through a bad patch and trust me they will come.
I asked Fred one day why he never stopped or drastically reduced the amount he was trading when he had a million dollars. This is what he said.
"I have a glandular problem, I have this huge greedy gland that just wont let me stop. When I got to a million I immediately thought, why not ten million me old matey."
Here's a scary thought. There was a time during all this when I would have believed he could have done it.
Read more...
