Leverage and self-awareness


Leverage

The speculator must be aware of his risk and willing to accept it. The speculator uses a comparatively low sum compared to the futures rates (around 5-20% of the item's price) as a premium and therefore also to the possible price fluctuations. This gives the investment great leverage even on the loss side as the rate changes have great effects compared with the premium. If very high leverage is selected, i.e. only a low deposit is requested compared with the item's price, the higher the price because even a very low price fluctuation leads to a total loss.

When buying options the speculator can lose his complete deposit. Without an appropriate speculation plan, such a loss is much more likely than a profit for a speculative attempt. When considering our high transaction costs for the transaction a profit is random in such cases and a loss virtually preprogrammed.

This leverage is the risk but also the draw of such futures transactions. The higher the leverage selected, the higher also the risk.


Ability to speculate, not general asset management

Observers of futures markets claim that 70-90% of speculators lose in future markets and that this loss rate also applies to leisure speculators. A study in the US provides a plausible explanation for this. 95% of speculator accounts lost in the market after one or two speculative transactions. The speculators placed all their money on one "card", i.e. commodity, after deducting the overheads for the transaction (commissions etc.). The likelihood of making a profit or loss was 50:50 as the typical private speculator does not make any currency calculations.

When considering the advice and transaction costs the likelihood of a loss if far greater than of a profit. Once the speculator had lost the money used it was no longer possible for him to get back the sum lost in the market due to a lack of speculation funds. Most losers are one-off or short-term speculators. This also applies to speculation with high consulting and transaction costs, no matter the speculation funds available.

The higher the share of transaction costs the lower the chance of getting a profit until such a speculation changes from a game of skill to a game of chance, i.e. profit only depends on chance and at some point all the speculation capital has been used up.

Advice or action by a financial service provider can not change this. Statements to the contrary should not be taken seriously.

Please also note that our activity is restricted to highly speculative areas and should not be considered general asset management. You should only take part in stock market futures transactions as part of a complete portfolio and should have other conservative asset investments so that you can deal with the total loss of the money used.


Self-knowledge

The leisure speculator must fully understand the motives and purpose of his speculation. It is virtually impossible for him to achieve profit over time. On the contrary he must assume he will make a loss. For an amateur or leisure speculator profit is at best a pleasing subsidiary or random benefit. Therefore the intention to make a profit should not be the reason for the speculation. Anyone crying after lost money is not suited to speculation. Anyone who can not afford to lose the money should not speculate. Speculation is a game. This game in the real economic world is highly entertaining and exciting. It also teaches us a lot.

The speculator who has done his homework on his speculation learns more about how the global economy works than virtually anybody else. These effects of speculation should not be overlooked. Because those needing profit from speculation to live and do not earn their money in other ways should not get involved in speculation or must fulfil the requirements of a professional speculator who does not speculate with such high transaction overheads. Finally, the speculator should also know whether a managed or discretionary account is right for him. Whether profits can be realised depends on the costs and quality of the manager. The allure of getting involved in the rates and transactions oneself is lacking if the decisions are delegated to a third-party.