Learning the Hard Way – 3 Traders Who Lost Everything
People become traders to gain financial independence and generate profits on a regular basis. However, some of them fail big, and we’re about to share three stories of traders who lost everything in a blink of an eye.
We’ll start with a young trader from Vancouver, Canada, who used to buy contracts for difference (CFDs) related to the US stock market, especially NASDAQ and Dow Jones indices. His strategy was simple – he spotted dips and entered the market with long positions and then was selling when the indices were moving to new record highs. Our trader, whose name was not disclosed, was actually successful for a few months, and he managed to spend the earned money on buying expensive musical instruments.
One day, on February 4, 2018, he noticed the Dow Jones was dipping again, so he decided to go long from his smartphone app. He moved $4,000 into his trading account and started to buy CFDs related to the two mentioned indices and Google. He knew that the markets would continue to decline for a while, but in the end, they should have retaken their uptrend and maybe update the record highs again – at least this is what he hoped for.
But Dow Jones was severely bearish, so our trader got margin called several times, being forced to invest a total of $10,000 in the hope that the crash would stop at some point. Well, the trend reversal occurred on February 9, but it was too late.
“I’ve made money in the past catching these dips. Except today it’s not just a dip. The market is continually crashing. And it all happened so fast,” he lamented on Reddit.
The second story is from Arizona, US, where Joe Campbell, a 32-year-old entrepreneur, decided to short the stock of KaloBios Pharmaceuticals – a biotech startup. In 2015, he sold approximately 8,400 shares short at the price of about $2. He estimated that the real value of the stock was about $1, which means he expected to make at least $8,400 from that deal. He was so confident that he didn’t bother about setting stop-loss orders.
However, news that an investor group had purchased a major stake in KaloBios pushed the stock price up 600% in the after-hours session, to about $16 per share. Campbell went to a two-hour meeting, and when he came back, his account with E-Trade displayed a debt of over $100,000. Since he had about $33,000 balance in his account, the total loss reaches $140,000.
Campbell started a GoFundMe page to collect funds to pay the debt to E-Trade, as he had lost all of his money.
As you can notice, we structured our stories in ascending order, so the last one is not about tens of thousands and not even hundreds of thousands. Last year, a 23-old investor from Singapore had a terrible week. He managed to turn $50,000 into $4 million in about three years but lost it all in a week.
“I’ve lost $4 million, three years worth of work, and other people’s money,” the investor wrote in a Reddit forum.
The trader put his money in the VelocityShares Daily Inverse VIX Short Term ETN (exchange-traded note), with the ticker XIV. This product allows traders to bet against market volatility and shows an inverse performance of the CBOE Volatility Index (VIX). To put it simply, when the latter gains 10%, the XIV loses 10%. One day in February 2018, XIV collapsed by over 90%, from $99 to $6, after moving in a long-term uptrend for about three years.
The crash of the XIV forced its issuer, Credit Suisse, to liquidate the fund and activate an “irrevocable call notice.”
“You always hear stories about how people get cancer and how people get randomly killed in the street or about how they lose all their money, but sometimes you find it hard to believe that it will happen to you,” the investor told the press.
What is the conclusion of all these stories? Well, if you don’t apply basic money management techniques, then you might easily lose everything. Sadly, all the traders above ignored these rules. Money management principles are among the first rules taught in trading schools.
Education should be an essential part of any novice trader. By following a list of simple but important rules, anyone can reduce risks to a minimum.