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- How did this day trader lose so much? 3 answers
Recently I have been reading a book called Market Wizards. The author talked about his own experience:
"I had done a very detailed analysis of the cotton market throughout the entire post- World War П period. I discovered that because of a variety of government support programs, only two seasons since 1953 could truly be termed free markets [markets in which prices were determined by supply and demand rather than the prevailing government program]. I correctly concluded that only these two seasons could be used in forecasting prices. Unfortunately, I failed to reach the more significant conclusion that existing data were insufficient to permit a meaningful market analysis. Based on a comparison with these two seasons, I inferred that cotton prices, which were then trading at 25 cents per pound, would move higher, but peak around 32-33 cents.The initial part of the forecast proved correct as cotton prices edged higher over a period of months. Then the advance accelerated and cotton jumped from 28 to 31 cents in a single week. This latest rally was attributed to some news I considered rather unimportant. "Close enough to my projected top," I thought, and I decided to go short. Thereafter, the market moved slightly higher and then quickly broke back to the 29-cent level. This seemed perfectly natural to me, as I expected markets to conform to my analysis. My profits and elation were short-lived, however, as cotton prices soon rebounded to new highs and then moved unrelentingly higher: 32 cents, 33 cents, 34 cents, 35 cents. Finally, with my account equity wiped out, I was forced to liquidate the position ......"
My question is why the author's account equity was wiped out. In my opinion, he went short with a price higher than 25 cents per pound, which means he earned money, no matter how high the price moved afterwards.