This story happened at the beginning of 2016, but it is so revealing that I would very much like to introduce FxCash blog readers to it. She is also very instructive and is almost a reference example of the error of a trader who ignored the rules of risk management. It is worth saying that the broker himself did not do very well in this situation, but on the other hand, the trader ignored the offer. The result for the trader is deplorable, but it will be a good lesson for those who think that you can easily earn money on Forex without any skills.
Trader’s mistakes: how to lose millions in one day
Denis Gromov was a simple private trader, and as he was even dubbed in the media, beginners. Although this point is quite controversial, given the amount they invested. December 30, 2015, he made a significant contribution to the volume of exchange trading in the US dollar. Being a simple manager of a small company, in just 4.5 hours, Gromov carried out more than 5,000 transactions totaling 42 billion rubles, having only 5.6 million rubles on his account. The result was logical: it not only lost money, but also owed the broker 9.5 million rubles.
At the age of 38, Denis Gromov did not excel at any special achievements, but the idea that something could be earned somehow did not leave him. He inherited 6 million rubles by inheritance, and the fact that the US dollar rate had risen by more than 20% at that time attracted him. He had no experience of trading, but why not take the risk? As a broker, a reputable bank was chosen that also provides services on the exchange and over-the-counter markets.
As Gromov himself would say later, he had been thinking about making money on exchange differences for a long time, but simply changing currencies in banks was not profitable because of the high margin. Then he decided to open a brokerage account. Three months remained until the significant December day.
On the eve of the New Year, Denis noticed that the USD with the expectation of the next day cost a little more than with the expectation of today. But even this difference would allow him to make a profit taking into account the margin. According to the brokerage report, a novice trader in 40 minutes managed to conduct 2660 transactions, buying USD for the current day and selling them at the rate calculated for the next day. Leverage was added to the money in the account, which allowed Gromov to increase the turnover on transactions tenfold. It seemed that there was no error of the trader anywhere.
According to Gromov, he did not hide his admiration, seeing an increasing balance. Happiness was short lived. Literally a few hours later the phone rang. The broker manager told Gromov that the trader did not pay attention to one detail in the trading platform, as well as the offer, according to which at the moment the trader needs to pay interest, much larger than his profit, for using the credit money. To the question “What to do,” the manager advised to reduce the amount of borrowed funds, for which Gromov had to deal at a loss, the opposite of what he had done before.
The bank itself explained the situation as follows: limits on operations in the foreign exchange market can be set in different ways. If some brokers set limits on individual instruments, in this situation the limit was set for the asset, that is, the currency. Therefore, Gromov was able to use such a large leverage without triggering a stop out. Large interest on borrowed funds was due to the fact that the next working day of the bank was only on January 11, and in fact Gromov borrowed money not for a day, but for 12 days. According to representatives of the bank, the trader’s mistake was that he did not take into account the cost of arbitrage trading. Given the volume of trade, Gromov did not have time to fully repay borrowed funds and for the balance of 2.7 billion rubles, for 12 days a percentage of 8.9 million rubles was calculated.
The story is not over. The unlucky trader made an attempt to defend his case in court, appealing to the fact that he did not have complete information and the bank intentionally misled him. In his claim, he demanded that the bank lost 4.9 million rubles, but according to the outcome of the trial, he not only did not return the money, but remained due. In mid-2017, the court ordered Gromov to return to the bank 9.5 million rubles of debt and interest.
The moral of this story is:
- Easy money does not happen. If you get an easy opportunity to earn money, look for a trick.
- Follow the rules of risk management. Rarely use all sorts of loans.
- Carefully read the terms of the offer.
Be careful and do not make the classic mistakes of a trader!