How A Trader Self-destructs In 4 Minutes

By | March 31, 2016

This is one of the traders at Darwinex I had my eyes on ever since he listed his DARWIN and I thus became aware of him. In a sea of <$500 accounts with EAs toiling on them, here was this guy with an account that I estimated to be around £10k, trading most probably manually and having a great risk-adjusted performance.

My initial reaction

The statistics looked good, but I soon realized two things:

1. I knew nothing about this guy and his trading strategy

2. From the available track-record, I couldn’t tell anything about his ability to handle a losing streak, which is kind of like declaring a driver is skillful because he didn’t have an accident driving in sunny weather on an empty highway. How about driving at night, when there’s lots of traffic, in rainy or snowy conditions and so on ?

So I was in for a bad surprise when the other day I saw this:

Performance

Value at Risk (VaR)

So what happened ?! Looks like the trader simply lost his patience and decided to start gambling. A monthly VaR which for the greater part of 2015 stood around 5%, in 2016 it gradually increased to 9% (no reason for alarm yet) and then suddenly in March it jumped to 27% and then 70%. For more details, we can go to the trading journal tab:

Trading journal

Here we can see that it only took 4 minutes on the 16th March (during the FOMC press conference) and an insanely leveraged position in EUR/USD for this guy to lose ~25% of his account. My first thought was that he must’ve been affected by some really bad slippage. Let’s give him the benefit of the doubt. But checking the charts and the time the trade was entered, I could easily see the FOMC generated commotion was all gone by the time he opened this disastrous trade. Furthermore, a few other trades were opened shortly thereafter, with even higher leverage – but fortunately for him these didn’t cause any more financial damage.

We could imagine all kinds of scenarios for what made this guy act so recklessly on the 16th. But the data shows that this wasn’t just an one-off. The first sign that this was all part of a deliberate action, and not some accident, was the leverage used a week earlier, on the 9th of March, which was way higher than what had been customary in the past. And also the trading afterwards, on the 18th.

So here are my takeaways from this sad story:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. – Warren Buffett
  • excessive use of leverage kills or severely cripples your account (no news here, but this is worth repeating)
  • to be able to appraise a trader, statistics are not enough – they are even less useful if they only cover a period with positive performance
  • as an investor, having an independent risk manager is essential to protect yourself from the vagaries of the trader’s behavior

8 thoughts on “How A Trader Self-destructs In 4 Minutes

  1. Anonymous

    It was just only one trade in 4 minutes to take away over 26 percent. The market was quite slow at that time so I dont think it was slippage or he was impatient. His average trade duration is over 8 hours. So its very strange that he had to close the trade after just 4 minutes to lose over a quarter of his account.

    The only possibility I can think of is that, his account balance isnt of $10k as you guess but only around $20 – $100 ( which is the norm for most Darwinex accounts). So he normally traded with 0.01 lot/ trade. But for some reason, he had to re-install the MT4 and the default size was changed back to 1.00 lot. And he forgot about that and just happily clicked the trade button without checking. So he was risking 100 times than he normally would and had to close the trade immediately to protect the account.

    Reply
    1. Christopher

      Anonymous, what you say is certainly plausible. Assuming the account is only a couple hundred the spread of a 1.0 lots position would be a significant loss to his account, even if he closed the position straight away. However, even with high leverage he wouldn’t have enough available margin to take a 1.0 lot position with only a couple hundred in his account.

      Regardless of why, JL does raise a good point. And for me this is just another big negative for Darwinex and for the reputation of professional traders using Darwinex for asset management. Think about it, institutions are not going to take anyone seriously when there are people doing this. One bad apple can spoil the bunch. I didn’t join Darwinex for retail investors, I joined for the exposure to institutions but for them to do there due diligence before investing they would be looking at all of the darwins, even the ones they don’t won’t to invest in, and they would do this to guage the type of traders listed with Darwinex. Anyways, perhaps darwinex should not list a Darwin until it has 12 months of track record which meets a risk management criteria, forcing traders to trade properly or not get listed at all.

      Reply
      1. Anonymous

        The account could be more than $100, probably around $400. Its not strange for E/U to move 10 pips in 4 minutes, and with commission fee and spreads, that could be negative over $100 easily.

        Reply
      2. JLTrader Post author

        I thought a bit more about this ‘reputation’ thing and I came to a different conclusion. Darwinex markets itself as an exchange (hence the name, DarwinEx) where people (retail or institutional) can purchase these financial assets called DARWINs. I look at it as something similar to a stock exchange (where you can find blue chips but also shitty penny stocks) or a catalogue of hedge-funds (Barclayhedge for instance, where you can find some dubious listings too).

        Now, every investor can do his due diligence, there are plenty of screening tools offered, and they are continually being improved and expanded. In this particular case, an astute investor could’ve bailed out after the 9th March, due to the extreme change in trader’s behavior. But even if this opportunity was missed, the ‘airbag’ provided by the Darwinex risk management algorithm ensured that the investor escaped with minimal damage.

        While I said before that the barrier for listing DARWINs is too low in my opinion, I can understand the other side’s arguments as well, especially with the introduction of Dwex and its ‘shorting’ feature: https://www.youtube.com/watch?v=qDMNicuIFNw

        Reply
  2. JLTrader Post author

    A few points: – the balance was ~£10k (GBP not USD) -> this can be calculated by multiplying the current VaR and the amount posted under ‘Trader’s risk’. There’s no doubt here. The decent sum of money in the account was one of the main reasons I kept an eye on him
    – it couldn’t have been an accident as this reckless behavior was manifested over several days and trades
    – regarding damage to reputation: an investor is protected a great deal by the fact that DARWINs are 20% VaR standardized. The difference in performance for March between strategy (what I’ve discussed here) and DARWIN showcases this aspect.

    Reply
    1. JLTrader Post author

      The 6 rankings, from Amoeba to Pro are determined by the grades in the 6 Investable Attributes – for complete explanation click on ‘how the levels work’ tab, which is right under the ‘Darwinia earnings’ tab in the Strategy page.

      Reply

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