Brain Teaser Trading Test

Take the personality test…a little mind teaser by Michael Still! See how you perform. The test is based on actual experiences from my own trading with actual outcomes. Try going through it twice and see where you end up if you made a different decision…

Brain Teaser Trading Test

You have been trading for 2 months using spread betting which allows you trade both long and short. You started with a trading account balance of £3000.

You use swing trading methods to trade with the trend and enter on a reversal in the direction of the trend after the stock has retraced back to between the 20 and 50 day moving average.

You have done well and made a 15% return a month resulting in a new trading account balance of £4000. That is a 25% return on your initial trading account balance.

You are ecstatic with your trading performance. You feel you have a means of getting out of the rat race……. Could you one day work for yourself!?  The world is looking like a bright, bright place…

You are a winner… Life is good!

Subsequently…

It is Thursday evening. You have 10 short positions open and 5 long positions have closed for a profit for the day of £200. You are happy with yourself.

The FTSE 100 ended down for the week. At 6pm Thursday evening you notice that Wall St (the DJIA) is shooting up and your remaining open positions are all short (you want the market to go down not up in order to make money on your positions).

At 9:30pm on Thursday after Wall St has closed you check the closing price of the DJIA index. It has risen 245 points for the day. This is a considerable rise, the largest single daily movement for more than 3 years on the index.

You wake up Friday morning and wait for the London Stock Exchange to open at 8:00am. It is 8:01am and you are logged into your account. Instantaneously, your open positions are now down a total of £300. You panic. With 10 open positions open, the largest move on the DJIA in 3 years in the opposite direction to the positions you have open. You panic…

You decide to hedge against your open positions by going long on the FTSE100 index. Any upward move in the FTSE on this new position will offset losses on your open short positions. You open a position of £5/point long on the FTSE 100 at 6246. The market falls. You open another £5/point long on the FTSE 100 at 6242. The market falls, in the opposite direction to the direction of the huge movement upwards on the DJIA the evening before. You open another £5/point long at the FTSE 100 at 6239. The market falls again, you open a final position on the FTSE 100 at 6237 of £5/point. You are now long £20/point at an average of 6241 on the FTSE100. At that level, just a small move of 15 points over 6241 on the FTSE 100 will offset the £300 of losses on the 10 open short stock positions.

You have stops in on the FTSE positions at 6122 average. You head to work, monitoring yahoo! finance on your mobile. The FTSE rises above 6241 to 6243 and you are up £40 on your FTSE positions. Things are looking good.

You get off the tube at 9:00am and walk to work. Checking yahoo! finance again and the FTSE has fallen down to 6200 and your FTSE 100 positions are now at a loss of £800. The 10 open stock positions will have slightly reduced from their £300 loss with the lowering of the FTSE.

You are now down a total of £1000 on your account of £4000. What do you do? The DJIA had the biggest rise in 3 years the day before. The FTSE 100 is now down below where it closed yesterday.

 
 
OPTION 1

You keep your positions open and monitor them over the day. The FTSE will come back to levels above your average position and you will make large amounts of money once the FTSE100 follows yesterday’s massive move on the DJIA

or

OPTION 2

You close your positions and take a loss of £1000 or 25%

 
 

You Choose Option 1

Overnight in the States the market mood has changed and when you check your position in the morning, it has been closed out for a £2400 loss!!!!

You decide that you never want to trade again. You cash in and become despondent….

Welcome to the experience of many beginner traders!

 
 

You Choose Option 2

Well done. It might not look like an impressive situation to be in, but believe me, you came off a lot better than I did and you still have a reasonable account to trade with. Will you learn from this lesson??

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