How A Trader Self-destructs In 4 Minutes

By | March 31, 2016

How A Trader Self-destructs In 4 Minutes

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:


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