Tips from a trader

Alessio Rastani has outshone some big stock market voices this week. Few knew who Rastani was until BBC unleashed him on the world. A small-time independent trader, he pronounced on a business programme that “Governments don’t rule the world, Goldman Sachs rules the world.” A few minutes after he said that, his broadcast went viral on YouTube. In the hours that followed, BBC was plagued by accusations that Rastani is a hoax, a psychopath, immoral and even Satanic. Ultimately it seems, in the cloak-and-daggers world of banking, Rastani has emerged, at least, as vaguely honest.

Rastani is a 34-year-old self-styled independent trader who doesn’t like working for anyone else. He doesn’t live in a multi-million-pound London flat, but a rather modest £200,000 one, which belongs to his partner. Rastani has other traits that make him endearing — he bets with his own money and he doesn’t punt with the billions in savings of householders who have no clue what a trader is doing with their money.

With Rastani’s risks being entirely his own, he has a set of rules he follows. In a Forbes interview, Rastani lays bare some stunning tips that have the same ring of truth as his Goldman statement which should be read as “money rules the world, not governments.” Here are three of Rastani’s most sensible suggestions that should be pinned to the desks of all investors.

“The best traders know how not to lose money, to protect against risk.” This is the fundamental principle that endears traders to investors. While everyone loves a trader who makes them money, they hate traders who make them lose some. Sure, many complain that their stock portfolio hasn’t grown hugely, but that's always out-bellowed when the portfolio shrinks. Losing sight of risk is what typically sparks great losses. It is what triggered the sub-prime crisis in 2008. Nick Leeson’s unchecked risk-taking caused the collapse of Barings in 1995.

“If you see something not working for you, if you get into a trade, you have to get out. Never get into a position that you haven’t fully analysed.” This has to be the most fundamental rule in trading and also the most flouted one. History shows us that all rogue traders, from Leeson to Jerome Kerviel of Societe Genrale and most recently the UBS rogue trader, got caught in a spiral where they could not get out and the risks kept piling up. Ultimately, it caused the total collapse of the institution they were in or left gaping losses.

“You can be good at trading direction, but you can never be 100 per cent sure of magnitude.” Ask the former employees of the now defunct Lehman Brothers and ask some Merrill Lynch old timers. In a fast moving market, where trillions of dollars move at the same time, it’s easy to say that prices will move up or down. Even if you are the biggest market mover, though, it’s always hard to gauge who holds what. In the current euro-zone crisis, and indeed the 2008 mortgage crisis, policy-makers and bankers are only just guessing the scale of the problem with a very poor real estimate of it.

Rastani’s attention-seeking statements on BBC, contrary to the criticism they have garnered, should be seen in a different light. They should have come as a sobering voice to those who still think that the banking world has learnt its lessons and that all traders live in dread of economic turmoil. Don’t heed Rastani’s doomsday predictions, but his frankness is worth taking note of.

Anjana Menon is a Delhi-based writer