18 Apr A Key Trading Skill That Helped A Trader Make More Than $34M
Some of you may remember a story from last August, where a Japanese trader made $34M from shorting the Japanese Stock Market. In many regards, this story is very similar to a trade that my student, Andy Man, did in turning $1,600 into $1.7M. What’s the secret you ask? A concept called ‘Pyramiding’.
Pyramiding is all about recognizing the winning performance of a trade, and increasing exposure to that instrument through additional positions. Effectively, it is compounding your investment in a particular instrument when there is a sign of strength in the trend, rather than taking small profits. As such, you stand to significantly increase your returns, without necessarily exposing yourself to any notable level of risk – particularly when implemented in a trending market.
Back to the original story, and the Japanese trader in question sensed that in August 2015, Japanese markets were poised to slide as they were showing little indication of recovering after major sell-offs. With momentum in the markets behind him, the trader opened short positions against the Nikkei 225 futures market – starting with 200 contracts, he continued to accumulate over the next week until August 24, when the futures index plummeted over 5% – leaving him with a profit of $13m. Convinced that the downward trend remained strong, and that the negative feedback loop from the US markets would play into his hands, he didn’t close out his position – instead, he added additional shorts to his portfolio. When markets resumed, his profit had more than doubled. However, sensing that there was another opportunity present, his next target was to catch the rebound in the market. Adopting a long position, he was able to use his earnings to build his profits into nearly three times what they originally were – all the more impressive, he was able to pick the bottom of the market within a range of 10 seconds!
The above story highlights the importance of having the necessary skills to profit from movements in either direction within the stock market. At some point, the market is going to suffer a considerable setback and crash. Being able to identify the prevailing trend, and then gradually increase your exposure in alignment with this trend, is the key to building your wealth from a small base.