How to Turn $ 5,000 into a Million

S&P 500 (Standard & Poor’s 500): Stock index comprising the shares of 500 of the largest US listed companies

Spread: The spread between bid and ask prices

Stock index: Indicator of the performance of the stock market as a whole, or of individual stock groups (e.g. Dow Jones)

Stop Buy Order: An order to buy or sell securities, which will only be executed when the price reaches a certain price level

Stop Loss Order: A sell order that is best executed when a specific price is reached

Stop Management: Active management of stop orders during a trade

Swing trading: A trading strategy in which a security is held for between one and several days, in order to take advantage of price changes or fluctuations

Subprime crisis: Refers to a global banking and financial crisis as part of the global economic crisis as of 2007

Take Profit Order: Automated stock market order, triggered when a predetermined price target has been reached

Target price: Stock market price that a security should achieve, on the basis of an analysis

Tick: Smallest price change on a futures market

Trailing-Stop: Automatic stop-loss order

Trend Following: Trading strategy that focuses on following a trend that has been identified

Ukraine crisis: Political, at times armed conflict over the Crimean Peninsula

USD/CAD: Currency ratio between the US Dollar and the Canadian Dollar

USD/RUB: Currency ratio between the US Dollar and the Russian Ruble

Volatility: Standard deviation. Indicates how much a price fluctuates

Global macro: Investment strategy based on the interpretation and forecasting of major events related to economies, history and international relations.

Hedging: Method of securing a transaction against financial risks, such as price fluctuations

Heikin Ashi Chart: Japanese: “balancing on one foot”. Japanese representation of price changes

Hit rate: The hit rate describes the ratio of winning trades to losing trades

Initial Margin: Amount of collateral required to open a position

Interest rate: Fixed by a central bank within the framework of its monetary policy, based upon which it concludes transactions with its affiliated banks

Leverage effect: The use of borrowed capital increases the return on the use of one’s own capital

Lira Crisis: The Turkish Currency and Debt Crisis 2018

Long: Being Long means buying and holding securities holdings

Margin: Secured position for exchange transactions by depositing a certain pledge

Market Efficiency Hypothesis: According to this theory, financial markets are efficient insofar as existing information is already priced in, and thus no market participant is able to achieve above-average profits through technical analysis, fundamental analysis, insider trading or otherwise

Money management: Money management is a value preservation strategy that aims to manage the risk of a portfolio of securities by sizing each trade position

Nymex: The New York Mercantile Exchange (NYMEX) is the world’s largest commodity futures exchange, based in New York

Option: Indicates a right to buy or sell a particular item at a later date, at an agreed price

Path dependence: Inverse effect, which applies from closing price to closing price. If the period becomes longer, deviations occur

Pip: Percentage in point, smallest change in the price in forex trading

Pyramiding: In stock trading, refers to the gradual establishment or reduction of positions

Quarterly earnings: Report of a stock corporation at the end of a quarter

Range: Price range in which a value is traded in one phase (one day, one week, several months)

Resistance: Price level, where more sellers emerge, than buyers

Reversal: Reversing a price trend within a trading day

Risk Management: Includes all measures for the systematic detection, analysis, assessment, monitoring and control of risks

Risk Reward Ratio (RRR): Serves as an indicator of the usefulness of a speculation. It is calculated by dividing the expected profitability by the largest possible loss

Scalping: Trading technique in which the trader tries to trade minimal movements in the market

Short position: a trader is short when he sells a position that he doesn’t own (short sale)

SNB: Swiss National Bank

Glossary

AEX: Stock index of the Netherlands, which is calculated on Euronext Amsterdam

Averaging down: Process of buying additional shares of a stock at lower prices than the original purchase price. This lowers the average price an investor pays for the whole position

Bond: A bond, also known as a fixed-income security, is an interest-bearing security

Book profit: Difference between the purchase price and the current price. This profit initially exists only on paper. Only when the stock is sold, can it be realized

Bovespa: (Índice Bovespa, abbreviated Ibovespa) leading stock index in Brazil. It consists of 71 companies

Break Even: Point at which there is neither profit nor loss

Brexit: The withdrawal of the United Kingdom from the European Union

Broker: A financial service provider responsible for executing securities orders from investors

CAC 40: French benchmark index of the 40 leading French companies listed on the Paris Stock Exchange

Candlestick: Representation of price changes based on a Japanese analysis technique

Cash Flow: The difference in revenue and expenditure over a period of time

CFD: Payment agreement, the value of which is the difference between the prices of the underlying value, such as a share or currency, at the time of purchase and sale of the CFD

CME: The US-based CME Group is one of the world’s largest option exchanges and the world’s largest derivatives exchange, based in Chicago, Illinois

Commissions: costs incurred on the purchase and sale of securities

Credit Default Swaps: (CDS) Credit derivative in which default risks of loans are traded

Day trading: describes short-term speculative trading in securities. Positions are opened and closed within the same trading day

Dividend: part of the profit that a public company distributes to its shareholders

Dow Jones: The oldest surviving stock index in the US, today comprising 30 of the largest US companies

Doji: Frequently occurring pattern in a candlestick chart. It is characterized in that it has a short length, which means a small trading margin, with the opening and closing price being almost the same

Downgrading: Downgrade of a security

Entry Strategy: A strategy that determines the entry into a market

ESMA: European Securities and Markets Authority

ETF: Exchange Traded Funds

Euro crisis: describes a complex crisis of the European Monetary Union from the year 2010

Exit strategy: A strategy that determines the exit from a market

EUR/CHF: Currency ratio between the Euro and the Swiss franc

EUR/TRY: Currency ratio between the Euro and the Turkish Lira

European Exchange Rate Mechanism: a form of monetary cooperation between the countries of the European Community, from March 13, 1979 to December 31, 1998

Fait accompli: A French term that is often used to describe an action that is completed before those affected can question or reverse it

Financial Crisis: Global Banking and Financial Crisis as Part of the Global Economic Crisis as of 2007

Flat: Flat position

Francogeddon: On January 15, 2015, the Swiss National Bank lifted the minimum euro exchange rate of 1.20 without warning. The Swiss franc increased in price by almost 20 percent

Forex: Forex Exchange Market, International Currency Market

Forwards: Non-exchange-traded, unconditional forward transactions

Futures: Standardized contract for the purchase or sale of a certain quantity of a commodity, at a fixed price, on a given date

Gap: price gap between two trading days

Addendum 2: Useful websites

Good overview charts: https://finviz.com

Investment calculator: https://www.calculator.net/investment-calculator.html

Long-term charts: https://www.barchart.com/futures/long-term-trends?viewName=chart

https://www.macrotrends.net/

Addendum 1: Past financial crises

The history of the financial world is rich in financial crises. As I said, whatever is dangerous or ruinous to some, may represent an opportunity for others. That has always been the case. If you want to become wealthy with stock market speculation, you are well advised to study past financial crises. Here is a list which is certainly not complete. Study these crises! You will then be better equipped to recognize future ones. In addition to the crises, you will also find the possible speculations that you could have traded successfully.

1973: Oil Crisis, long Oil, short Stocks

1973: Banking Crisis United Kingdom: short British Equities

1983: Bank Crisis Israel, short Israeli Stocks

1986 - 1991: Japanese Bubble Industry: short Nikkei, long Yen

1994 - 1995: Tequila Crisis Mexico: short Mexican Peso

1997 - 1998: Asian Crisis, short Indonesian Rupiah, Thai Baht, South Korean Won

1999: Brazil Crisis, short Brazilian Real

1998 - 1999: Russia crisis, short Russian ruble

2001: Turkish crisis: short lira, short shares

2001 - 2002: Argentina Crisis, short Argentine Peso

2000: Dotcom Crisis, short Nasdaq

2007 - 2008: Subprime Crisis, long Gold Silver, short Stocks

2008: Iceland Crisis, short Icelandic Krona

2007 - 2008: Spanish Real Estate Crisis, Short IBEX (Spanish Equities)

2010: Greek sovereign debt crisis, short ATHEX (Greek equities)

2010: Spanish savings bank crisis, short Spanish stocks

2010: Euro crisis, short Euro

2014: Russian financial crisis, short Ruble

2018: Turkish Financial Crisis, short Lira, short Turkish Stocks

As you can see, there is no shortage of crises. Almost every year there is a fire somewhere, from which you can benefit as a speculator.

Incidentally, there are not many different types of crises. Here is a list of the most important types:

banking crises
currency crises
speculative bubbles
sovereign debt crises (a state cannot repay its debt)
economic stagnation and recessions
If you want to deepen your knowledge of financial crises, I can recommend the following books:

Barry Eichengreen: Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History, Oxford University Press 2016
Ray Dalio: Big Debt Crises, Bridgewater 2018
Carmen M. Reinhart, Kenneth S. Rogoff: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press 2009
Robert Z. Aliber, Charles P. Kindleberger: Manias, Panics, and Crashes: A History of Financial Crises, Palgrave Macmillan 2017

Because that’s what the really wealthy have always done. They always have money, no matter what happens, because they (or their ancestors) have invested capital over and over again in assets: land, real estate, company holdings, licenses, lease income, dividends.

And when the cash flow for these assets began to exceed the sum of their monthly expenses, they used that free cash to buy even more assets that brought them even more money. In the so-called “old money families” this was done from generation to generation.

And that’s exactly how you should do it, in my opinion. You should not use your occasional stock market successes to build up an ever-growing account, with which you may splurge with your friends. No, do it right from the start. Learn to siphon off most of your profits and invest them in long-term assets. Do not wait until you have four million in your account, because then you might have the same problem as my entrepreneur friend. Or the same problem as the lottery millionaires, who disappear after a while.

Therefore, in my eyes, the goal of “one million in the bank” is a decoy. Such a sum may inspire your imagination. It is however better if you increase your financial IQ right from the start and learn how to invest in the long term, so that you can still benefit from this money decades after your stock market successes. It is possible. But only if you start right from the beginning.

So take the most of your profits out, and lock it away. With the rest, you can continue to speculate and hunt for lucrative opportunities. I wish you success!

If you skim off USD 70,000 of this money, you can buy a house or another asset. Invest this money into something you will still benefit from in ten years’ time. Preferably buy an asset that flushes money into your pocket monthly. The latest Tesla, for example, does not fall into this category. This toy will pull money out of your pocket and will be worth less month by month.

And that brings us to the important difference between an asset and a liability. An asset regularly flushes money into your pockets. A liability, on the other hand, costs you money. I owe this clear distinction to the books of Robert Kiyosaki. If you do not know them yet, I recommend you to buy them now.

Another way to generate monthly cash flow is to build a dividend portfolio with your earnings. This is one way to profit from your profits over decades. It’s really fun if you have something like that, believe me. You then own a cash machine that will bring you money every month, without you having to do anything big for it.

In other words, my recommendation is that you do not go from speculation to speculation until you finally have this million in your bank account. It may sound great to say: I am a millionaire. But this title does not mean much in times of zero interest rates.

And you may be surprised when I say now: it is even not desirable to have one million on the bank.

I want to explain this with a nice story. A friend of mine founded a company that he wanted to sell one day. And he also had enough interested buyers. He figured out he could get four million dollars for his business. Many would say: great, now he can really cash in, and live from the fruits of his labor. Not even close. My friend kept delaying the sale of his company. “Why?” I asked him when I met him again. It turned out he was really scared of the sale. Of course there were various reasons. But one of the most important was that he felt safe as long as his business belonged to him, and he was able to pay himself a (generous) executive salary month after month. Because, if he sold the business he would no longer have a salary. “Yes, but you could have four million in the bank,” I countered. “Sure,” he answered, “only this money will bring me hardly anything. What am I going to live on? “

This story may seem absurd to some readers, because they believe that anyone who has that kind of money in the bank will no longer have financial problems. Unfortunately, the opposite is true. If you have a million or even more in the bank, then you actually have a problem, as absurd as it may seem to less wealthy individuals. This “million in the bank” is nothing but a petty bourgeois dream. This dream is also the reason why so many people play the lottery. And it’s also why so many lottery millionaires lose everything after a while.

This million brings you hardly anything today. My friend knew that. Unfortunately, during his entrepreneurial life, he failed to invest the money he earned into assets that would have earned him a monthly cash flow (that is, a passive income). He had hardly any real estate. He had speculated a little with stocks and mostly lost. Unfortunately, the word “dividend” was alien to him.

Rather than hoarding a million on the bank or even in a trading account, it’s important to learn how to invest that money properly. In other words, in addition to your speculator career, you should also silently build up an investor’s career.

Chapter 23

The Final Goal: Financial Freedom

Even if the first million seems like quite a distant goal to many, it is not out of reach. The method presented here can be regarded as an important step on the way to this goal, it need not be the only one. By the way, I consider the nominal sum of one million dollars more like a symbolic goal. As strange as this may seem to non-wealthy readers, a million on the bank today is more of a problem than a solution. The times when such a sum would give you a yearly risk-free interest yield of 5 or 6% are long gone. And those countries with higher interest rates do not necessarily offer a solution either, because the compounding will be eaten up by the inflation or alternatively, the fraudulent state will seize the capital on a flimsy justification, as happened to a friend of mine who had parked a considerable sum in a Ukrainian account.

In other words, current interest rates are forcing anyone with some money to become an investor, whether they want to or not.

The method presented here aims to make quick financial progress. It’s undoubtedly an unorthodox method, but trust me, it’s being used by more traders than you’d expect. Many a trader, who perhaps outwardly sells a particular system with strict risk management, secretly does exactly what I’m talking about here, without ever saying a word about it in public.

My only goal with this book has been to present a way with which you, as a trader, can quickly achieve your financial goals. Of course you can also do it with traditional methods, such as day trading or swing trading. These methods are and will remain valid. But they demand an unshakeable discipline from the trader, that most of us – let’s be honest – do not have. That’s the reason why the number of traders who fail with these strategies is so large.

The method presented here assumes that most of us are not disciplined traders, but ordinary people who make mistakes every now and then.

But if, as suggested here, you bet on specific events or strong stock market trends, you only need to be right a few times. But then, when you are right, you should have the courage to step in big. Many traders, like Jesse Livermore, did it this way, gradually working their way up from humble beginnings.

Of course, you will not succeed with every speculation. Sometimes your position will barely earn you any money. Sometimes maybe only a few thousand dollars. Do not feel discouraged. If you stick to this idea, you will one day find the market in which you can make USD 100,000 or even more.

Maybe it will go a bit slower until you reach your first million, but you will reach your destination without undue stress. Maybe you are able to make profits of USD 100,000 a few times, or the money will trickle in gradually in USD 40,000 snacks. No matter how you do it, you should make sure that you put away most of your profits, and never risk them again.

This measure is just the opposite of what most traders do. They leave their profits in the brokerage account, so they can trade more and more contracts. For these traders, therefore, the bigger the account gets, the more the risk increases. I try to do the opposite. The further you progress, the more capital you should always draw from the speculative cycle. Remember, trading profits are not really yours, unless you have completely withdrawn them from the brokerage account, and preferably locked them away or invested them conservatively.

That way, you will have the highest risk at the beginning of your career as a speculator, and not at the end. Be smart. You can always speculate, but lost investment capital never comes back.

It is important to clearly understand the difference between a speculator and an investor. They have different goals, and therefore use different methods. The goal of a speculator should be to progress financially, as quickly and efficiently as possible. In this book, I have tried to portray how that is done.

The goal and task of an investor is a completely different one. An investor already has capital. His primary objective is to protect existing assets and to maintain purchasing power through a realistic and risk-free return.

I hope you realize that these are two completely different goals. The ultimate goal of your endeavor is not to have the largest possible amount of money in your brokerage account, but financial freedom. We will look at how to achieve this in the next chapter.

Chapter 22

On the way to the first million

One million dollars is certainly a high target, especially for someone who has just over a few thousand dollars available to speculate with. However, I hope that, with the examples I have shown you in this book, it will be possible to make significant profits on the stock market with small sums, no matter what some skeptics say. If I can do it, so can you.

But even though duplication and multiplication in small accounts are quite feasible, they are not so easy to achieve for larger amounts – but not impossible either. As you know, you only need to double 10 times to make a million from 1,000. It is hopefully clear to the reader that the step from 1,000 to 2,000 is quite different than the jump from 250,000 to 500,000, although mathematically it is the same principle.

Everyone who is active on the stock market should be able to get over the loss of USD 1,000. But can you afford to lose USD 250,000?

I’m well aware that there are traders who have suffered such losses (and even much more). At the end of this book, I would like to emphasize once again, that you should not let it come to that, with the method presented here.

The idea of this method is to take calculated risks. This minimizes the risk of a total loss of the available capital. You should become a specialist in speculation, achieving the maximum with minimal effort. Precisely for that reason, I recommend that you deduct the majority of your profits from the brokerage account and withdraw them from the speculative cycle. If you ever make USD 30,000 profit with a speculation, then withdraw at least USD 20,000 from the brokerage account. For the method presented here, by no means do you need USD 30,000 to speculate. On the contrary. I recommend keeping these totals small (this measure will teach you discipline).

If at first glance, this method could be classified as “high risk”, but this measure makes it less risky than initially suspected. The highest risk is in the beginning, when the available capital is still small. The further you progress, the less risky it will be if you consistently enter the market with just a small test position at first, and only buy more when you already have book profits.

Of course, you can risk a little more if you can call the first USD 100,000 your own. But since, for most speculation, usually no more than a few thousand dollars margin are required, there is no reason to leave USD 50,000 in your brokerage account. Be smart and minimize your initial risk as much as you can.