Halloween Trading Horror Stories

It’s Halloween and the eve of horror is upon us! To celebrate this haunting holiday, we’ve gathered a collection of true trading horror stories to see what we can learn from the bad experiences of others.

Now, we all know that trading can be delightful… but sometimes it’s downright frightful! So, pull up the blankets, lock the windows, and grab the popcorn as we get stuck into some real trading terror!

*We’ve changed the names in our stories for privacy reasons.

Netflix and chill?

As it stands, the well-known video-streaming service is sitting pretty with over 130 million subscribers worldwide and an annual revenue increase of 66.8% since 2010. Founded back in 1997 the US-based company is lauded for its revolutionary approach to watching TV, its easy-to-use interface and its hit shows like Orange is the New Black, House of Cards and Stranger Things.

But, the road to success never did run smooth! Back in 2011, Netflix announced that it would be dividing the company to provide 2 separate services: a streaming service and a DVD-by-mail service named Qwikster… Netflix also added that its customers would have to start shelling out $15.98 for both, instead of the previous subscription fee, which was under $10.

Everyone went mad. Investors couldn’t comprehend why Netflix was alienating their customers and dramatically changing the successful business model that had captivated the globe. As a result, their stock tanked, going from $295.14 when the announcement was made in July, to $116 in October. Netflix lost around 800,000 subscribers as a result (not a lot of Halloween movie rentals that year!)

In an attempt to control the collateral damage, Netflix issued an apology and desperately tried to bury the Qwikster body, quickly and quietly. Thankfully, the damage control that the company employed took some of the heat off and allowed the company to recover lost ground. Today, Netflix has more than recovered from its mistake, with its stock at an all-time high of $323.14.

So, what can we take from this? Well, first of all you can learn how to identify a simple mistake from a sinking ship.

Remember that no company is infallible and even the biggest of firms can make categorical errors. The important thing is how they fix their mistakes. If you’re investing in stocks, watch closely how the management of a company handles impending doom. If there aren’t significant changes made in the aftermath, perhaps it’s time to abandon ship rather than holding on in the hope of recovery.

Regulation, regulation, regulation.

Regulation, regulation, regulation. We can’t emphasise enough just how important it is to trade with a regulated entity. You don’t have to take our word for it though. Our next story very clearly demonstrates the dangers you face by trading with an unregulated broker.

In early 2009 as the Forex industry began to fire up, there was an influx of firms offering great trading conditions, fantastic spreads and a great golden elephant with your trading account. It was at this point that the rise of the dodgy broker became prevalent.

One firm in particular had just opened a branch in Hungary, offering its services not only to retail traders but also to professional investors. These high-net-worth individuals were introduced to the company’s fund manager and each investor (more than 20 individuals) contributed around $200,000 to the fund. Promises of annual returns of 10–30% were made, and the whole setup appeared to be a sound financial investment.

Each individual investor was given read-only access to the MT4 account with the pooled funds, where they could see the floating profit and loss. It looked great, the fund manager’s performance was living up to all of its promises, and the returns were rolling in.

However, a key lesson that all traders should learn is: if it sounds too good to be true… it most probably is. What the traders weren’t aware of, was that the fund manager had opened a significant number of trades, so the floating profit and loss of the account appeared to be in order. The individual traders couldn’t see however, that profits from closed trades had been withdrawn from the account and were systematically being siphoned off in an elaborate Ponzi Scheme.

This spelt disaster for the individuals who trustingly invested in both the broker and the fund manager.

As you’re probably aware, regulated brokers are required to contribute to an investor compensation scheme. In the event of broker misappropriation, traders have access to this scheme and are able to reclaim some of their lost capital.

However, as the broker wasn’t a regulated entity there was no protection for the individuals. No regulation meant that there was no regulatory body overseeing the activities of the firm, allowing the company to do as it pleased.

The shocking tale doesn’t end here though. To this day the traders are still going through the painstaking process of recovering their stolen capital! And the moral of the story? You should always trade with a regulated broker, so that you’re offered ample protection in the event of broker misappropriation.

Oh dear! Are you exposing yourself?

Understanding exposure and employing effective risk management will always be a difficult task for new traders… Some, though, have had a much steeper learning curve than others.

Back in 2013 a trader detailed a horror story and a half. David* was just getting to grips with understanding the fundamental factors of risk management. After working for most of his professional career as an architect, he decided that he would be able to commit more of his time to trading at home, providing himself with an extra income as opposed to spending long hours at the office.

After spending over 8 months practicing on a demo account, as well as investing in a few online courses, David decided to open a live account. Although his preparation for the move had been extensive, spending months learning about the implications of emotions on trading, the importance of selecting the correct lot size and the benefits of diversifying his risk, David had failed to account for a crucial factor in his strategy.

What David failed to understand was how the relationship between currency pairs can have a gigantic impact on his overall exposure.

David began small, with his strategy enabling him to build his account from a small $1000 to $17,000 over a period of 6 months. One particular day, however, David sold EURUSD expecting that the upcoming ECB meeting would have a negative effect on the Euro. At the same time, he bought USDJPY expecting the USD to appreciate against the Japanese Yen.

Instead, the USD dollar weakened significantly.

While this ghastly event on its own this would have been an issue for David, he had actually doubled his exposure to the USD by opening the two trades by effectively buying USD twice. Within a couple of minutes (following the release of the Fed minutes), David had lost almost all of the progress he had made, eventually losing about $14,900 the same day.

Aside from his mistake of not setting stop losses, David didn’t think about the consequences of the USD devaluing rather than strengthening. Always make sure that while you are trading you employ proper risk management before entering into a trade. Consider what steps you are about to take and the possible repercussions that could arise.

The Great Black Swiss Swan

As it’s Halloween we have to look at one of the biggest trading horror stories in the foreign exchange industry… Black Thursday, January 15, 2015.

It was a cold, dark and blustery Thursday in London. The pigeons were awakening around Canary Wharf and the buzzing atmosphere was yet to rear its head. The Swiss National Bank however, had been preparing for an announcement that would make its way into the history books.

On January the 15th the Swiss National Bank dropped the SNBomb when they announced the removal of the cap maintained on the foreign exchange value of the Swiss franc relative to the euro. The statement provided by the SNB said that “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of deflationary development. The SNB is, therefore, aiming for a substantial and sustained weakening of the Swiss franc.”

Overall, the aim was to devalue the currency to make exports from Switzerland cheaper… That however, wasn’t the initial response. The markets went crazy, hungrily buying Swiss francs which, in turn, sharply pushed up the currency value against the euro.

It was a bloodbath! The Swiss stock market dropped by more than 13% and the Franc shot up by 30% against the euro. By the following day the Swiss franc had increased in value from 1.2 francs per euro to be equal to the common currency.

As the financial world looked on in shock, the globe began to count the victims. One high profile fatality was a UK-based FX broker, who declared insolvency the very next day. This broker immediately closed its client positions, but the damage had already been done. The majority of it’s clients sustained significant losses and, when the client cannot cover their losses, the broker has to step in and pay the amount back to the liquidity provider.

This broker wasn’t the only victim of the SNB’s brutal tirade. As a direct result of the removal of the currency peg, a plethora of different brokers succumbed to the power of the market. With most brokers offering high leverages to their clients, losses were exacerbated to such an extent that many brokers couldn’t maintain regulatory capital requirements.

It was nightmarish situation for both broker and trader alike. Brokers were left owing millions to their liquidity providers, while hundreds of traders were left with negative balances and, in some cases, hundreds of thousands of euros owed to their broker. With no winners in a situation like this, it seems important to remind you all that, no matter how well you analyse the market, you can’t really account for a black swan event.

However, and probably more importantly, remember that you can mitigate collateral damage by trading with a broker that offers negative balance protection as a standard.

Taking the Expert out of Expert Advisor.

Joseph*, our last trading victim, had worked as global recruitment consultant for many years before he began forex trading back in 2010. Inspired by Warren Buffett, his goal was a simple one — find a way to make money while you sleep!

Slowly but surely, Joseph began to adapt and improve his trading strategy. As he progressed, Joseph started to understand that some of the things holding him back were that he couldn’t make trading decisions quickly enough, while his emotions often seemed to affect his trading.

After around 5 years, on a sunny Saturday morning, a pop-up jumped onto Joseph’s screen regaling tales of gigantic returns, little risk, and no need for any human intervention. He believed that he had stumbled upon his saving grace, which came in the form of an Expert Advisor (EA)… In the immortal words of the Godfather, it was an offer he simply could not refuse.

However, Joseph was no fool and didn’t fancy ending up with the proverbial horse’s head in his bed. So, he began to do his research and discovered that there was a huge range of scam EAs available across the web, all of them promising sky-high returns and minimal drawdowns.

So, Joseph made a very well-informed decision that he would find someone who was able to code an EA for him, using the strategy that he had been perfecting throughout years of trading.

This is when Joseph met Arjun… Arjun, although equipped with limited knowledge of the forex industry, had exceptional skills in web development. The two worked tirelessly over 12 months, designing and back-testing the algorithm. Finally, their testing procedure was continually generating great results and it was time to go live.

The results were astounding! Joseph went ahead and opened 6 other accounts, with a starting capital of $10,000 each, using a multiple account manager. After 5 months Joseph had made $250,000!

After 6 months of steady profits, Joseph grew impatient and believed that their profits could be amplified. He also decided that, as he’d spent quite a bit of time with Arjun creating the EA, he’d had quite a bit of exposure to altering code and tweaking things here and there…

He began first by altering the algorithm’s adaptive position sizing… significantly.

It worked! Almost overnight he made an additional $16,000. Joseph then discovered that, had he removed a couple of stop losses, he would have made an additional $35,000! So, he changed the code, went to sleep, and in the morning went into the office as usual.

Joseph’s confidence had built up to a point where he wasn’t even regularly checking the account. So, during a 3-hour meeting, when his phone began to beep, he ignored it… A couple of hours later and after another 15 email notifications, he glanced down to see who on earth was being so persistent!

Broker names filled the screen, with margin calls for all 7 accounts slamming into his inbox.

His blood went cold.

Joseph then realised that the changes he had made on the EA were replicated through the multiple account manager software, in all of his accounts…

Joseph had lost almost $230,000 in a single day.

We can only imagine how distraught, stressed and anxious Joseph was. Sadly though, it was all avoidable. Traders take heed: ‘if it isn’t broke, don’t try to fix it!’ When you manage to come across a successful strategy or develop your own software, remind yourself not to allow greed to overcome risk management and simple logic.

I hope that you’ve taken away some key messages about the importance of trading. Halloween may only come along once a year but our Halloween tales are a caution to traders all year round! Remember, you should always have a comprehensive understanding of the investment you are making, the risks involved and the dangers associated with trading with an unregulated broker.