A few years back, I was playing poker at a bachelor party. There were about 12 guys there, and the pot was around $100. During the course of the game, I had a few large open positions in the foreign exchange market. I kept a laptop next to me during the poker game so I could watch my open trades. While I lost at poker that day, I made over $15,000 in a few hours with my laptop. I was 22 years old.
Too bad I was already down over $100,000 at that point. It would make for a much better story, huh?
I’m a recovering day trading addict. I day traded my first stock when I was 18, and continued to trade through college first with stocks, then options, then currencies. I gained access to capital from credit cards, personal loans and even family members as my trades got larger, and my risks more out of control.
I ended up with over a quarter million dollars in debt because of my losses.
I’m 25 now and have not traded for almost 2 years. I lost my home, my credit, a girlfriend, and nearly my sanity because of my addiction. I lived on the floor of my small office for two months, spending some nights in my car because it was more comfortable.
Things are going much better now. I still have a long way to go to pay off the debts I have from my addiction, but I’m making progress. I have a place to sleep, food to eat, and family and friends who care about me. I feel truly blessed.
Here are just a few of the lessons I’ve learned over the past few tumultuous years.
Invest for the right reasons
I first started day trading to make lots of money so I could impress a girl. Yes, I know. Worst reason ever. Once I started day trading, and I saw a little talent (aka beginner’s luck) in myself, I got greedy.
My trading soon became all about the money. How much could I make in a day? $1000? $5,000? $20,000? Yes. Yes. and Yes. The bigger gains I made the more confident I felt in taking out loans to cover my losses.
I was in big time denial. And yet I kept dreaming of a big house, a million dollar bank account, and impressing all my friends.
Invest for your child’s education. Invest so that you can retire in comfort. Invest so you can sleep well at night.
Don’t invest to make a quick buck. Or impress a girl.
Don’t trade what you don’t understand
I thought I knew how to trade FOREX (foreign exchange) from a technical perspective, because I had some limited success trading stocks as a technician. I was way off base.
Bottom line: If you don’t understand the investment completely, stay away from it.
Take risks based on your strengths, not blind luck
Take risks where you are in control and that involve your passions or talent.
Buying a random stock because some talking head recommended it is not taking a risk. That’s just gambling. Can you control the price of that stock? No.
Let’s look at current example of good vs. bad risk. You’re a programmer named Sam in silicon valley. You’re sitting on a nice bit of cash and you think it’s time to get into the real estate market. You read a few articles online and start looking at foreclosures to buy in Vegas and Miami.
Now let’s say there is a successful real estate agent named John in Vegas who’s made a killing the last few years and wisely stocked away a ton of cash. John knows the market well, so well in fact, he’s had a list of 5 properties on office wall the last few months he’s been just waiting for price drops on.
Who should be buying homes? The answer of course, is John, the real estate agent. Sam the programmer is much more likely to have success starting his own web startup. Risk is really a relative term. You can minimize risk and maximize your returns when you invest in where your talents lie.
You’ll never find a more motivated and trustworthy investment than you.
Don’t hide your mistakes. We’re all human.
For nearly 3 years I hid all my losses from my family, friends, everyone. I kept my secret because I thought I could still correct my errors all on my own. And that was my biggest mistake of all. Sometimes we all need a little help.
Had I shared some of my early trading mistakes with my Dad, I might have avoided the huge losses I accumulated. I could have learned my lesson after losing just 10,000, instead of after 300,000 when I hit absolute rock bottom.
Updated January 16, 2010 and originally published November 26, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.