“Now, if a trade moves against me, I’m out.” – Charles Kirk
Many big and small financial institutions have collapsed – not just the only 2 that are mentioned in this article. However, the 2 institutions that are mentioned here are known to most well-informed fundamental analysts, especially those who also research past events in the financial world. Those 2 institutions didn’t collapse recently: they did years ago, but there are great lessons traders, investors and funds managers can learn from their sad stories.
When one falls into a pit he becomes a warning to others. One was Barings Bank (a merchant bank) which collapsed in the year 1995, and the other was Amaranth Advisors hedge fund, which collapsed in the year 2006. What can you know about these institutions? What led to their collapse? What can you learn from this? How can you prevent the collapse of your trading account/portfolios, no matter how small it is?
Barings Bank, founded and owned by Baring family, existed between 1762 and 1995. It was the oldest investment bank in the UK. This great institution went to ruin, following some irrational gamble by Nick Leeson (an employee of the bank). He was caught in a wrong side of the markets and he refused to smooth his positions. Instead, he was adding more to his losers. He lost about $1.3 billion while engaging in futures trading at the bank’s office located in Singapore. He was jailed, and later released in 1999.
Amaranth Advisors LLC was a hedge fund whose assets were worth nine billion dollars before collapsing in the year 2006 (After losing around five billion dollars). The fund made use of various strategies in speculation. It was founded by Nicholas Maounis and had its headquarters in Greenwich, Connecticut, USA. The person behind the colossal loss is a Canadian trader named Brian Hunter, whose irrational speculation on natural gas futures went awry. It was one of the biggest negativity in trading history.
When one falls into a pit he becomes a warning to others
We should stop deceiving ourselves (many people want to hear that they’re right even when the reality proves otherwise). It isn’t good to trade in the wrong market direction, especially when the primary trend is against us. When there is a vivid downtrend on the chart, it can only mean one thing: the price is skydiving. What is the best direction to take when the price is falling? On December 31, 2008, the USDCHF closed at 1.0669, whereas it closed at 0.9146 on December 31, 2012. Imagine what could’ve happened to someone who refused to close his long position or sought only long trades since 2008? Do you buy when your model signifies a ‘sell?’ Do you sell when your model signifies a ‘buy?’ Can you imagine how many pips the USDCHF has lost since the year 2008? There’s no bad thing with a downtrend, on the condition that traders accept that a market is weak and speculate accordingly. We make money in bear markets only when we sell short.
Learn a lesson from the fig-tree. A strong market would form a series of higher highs and higher lows, and conversely for a weak market (which forms lower lows and lower highs). For refusal to follow the line of the least resistance, a trader whose account was very big now has a very small account (meaning the person is poorer). Trading accounts have imploded because of refusal to know when to hold on to a trade and when to cut a trade.
For refusal to accept the reality on the markets, big financial institutions collapsed. It isn’t uncommon for some instruments to continue their weakness even when good economic figures come out, and as a result of this, my experience has coerced me to trade according to what I see. It’s imperative to know when some pairs/crosses should be bought and when they should be sold. It’s imperative to look at the price and do what it does, lest we regret. Profitable trading goes hand in hand with positive expectancy, realities, normal psychology and risk management.
Conclusion: When it comes to successful trading, consensus opinions would hardly feed you and your family. If consensus opinions worked, then majority would be winners. The modern market conditions don’t usually favor buy-and-hold methodology; and where the markets are perpetually weak, simply sell short and rake in profits. There are many permanently successful financial institutions, and there are ones that have gone kaput. The same is also true of private traders. We strongly wish that you become successful through your speculative activities. We urge you to learn how accurate risk management can lead to peace of mind and happiness in the future.
This piece is ended with a quote from Simit Patel. It’s all about taking small losses, so that your account can recover quickly when the markets become favorable.
“…Not every trade is going to be a winner, but so long as opportunities are taken and losses are kept small, this is not a problem. It is the big losses that are fatal, and it is the fear of taking trades that causes traders to miss the winners. Psychology is likely the biggest obstacle to success: taking small losses and bouncing back from them when setups appear is essential to success, and is the real reason success remains so elusive to so many.”