What is the meaning of the foreign exchange explosion?
If you have a little experience in operating the foreign exchange board or the stock market, you will understand what “open position” means. In the outer board, to understand the open position, you must first understand what the margin is, which will not be detailed here.
After investing in foreign exchange, some investors gradually feel that it is easy to make money by making foreign exchange speculation. They gradually become impatient and start to place orders according to some experiences of foreign exchange speculation. Finally, unfortunately, not only the money earned was lost, but also all their principal was lost, which is commonly known as the “explosion”.
A blowout is a loss greater than the amount of money available in your account after margin.
After the company is strong, the remaining capital is equal to the total capital minus your losses, usually a portion of the remaining.
Selling out is a hurdle that almost all traders must go through, whether they are retail investors or big traders.
The difference is that there are people who learn from their exposure and then rarely experience exposure or big losses;
Others, on the other hand, explode repeatedly, perhaps one month and again the next.
Those who survive are almost always able to do well in the trading world and even become gods in the eyes of ordinary traders.
So, how did they manage to reverse attack after the detonation and stay away from the detonation?
Let’s take a look below.
From making billions of dollars to going bust, the big boys can’t escape getting burned out or losing money, not just for the average retail investor, but even for the big boys.
Even traders with impressive records can blow up overnight.
Like most ordinary people, trading bosses often start with big positions and self-aggrandizement.
In this market, once you start to inflate and add to your position irrationally, no matter how good you were before, you can fall into the abyss.
Brain Hunter, a monster trader who rose to fame in the first World War, is a prime example.
He was a natural-gas futures trader for Deutsche Bank for three years, during which time he had a brilliant trading career and lost $51.2 million in one week.
But that was nothing compared to the battle that made Brian Hunt famous when he moved to Amaranth, a hedge fund.
In the summer of 2005, Brian Hunter spotted a “pick up” trade opportunity when he discovered that natural gas prices in the United States were very low at $6 to $8 per million British thermal units (MMBTU).
Brian Hunter decided that if he waited until the end of summer and into winter, when every household in the United States would be relying on natural gas to heat their homes, demand would soar and prices would rise with it. He piled into cheap natural gas call options and waited for prices to recover.
But before winter came, luck struck Brian Hunter.
On August 25, 2005, one of the largest hurricanes in history, Hurricane Katrina, swept through the United States.
A large number of natural gas production operations in the United States were destroyed, resulting in a severe loss of supplies, and due to the hurricane’s destruction of road transportation, the relevant personnel were unable to timely repair.
The price of gas immediately jumped from $6 to $14 in October, peaking at $15.38 in mid-December, and then quickly falling back to $6.
Brian Hunt made a name for himself by placing a call option on natural gas that paid off. Fortunately, even his short position in natural gas, which he used as a hedge against risk, benefited from the subsequent drop in natural gas prices.
How much money did Brian Hunt make in the fight?
His Amaranth hedge fund, which was negative 1% in the first half of 2005, returned 5% positive in August, 7.5% in September, and 15% that year, growing to $7.2bn under management.
Brian Hunt personally took home a whopping $113 million bonus.
It was also after this war, Hunter began to drift, he thought that if he could earn one hundred million, he would certainly earn more. Since then, one hundred million has been completely a small target in his eyes.
After gaining the trust of his boss, he set up a business unit and moved his work from Connecticut to his native Calgary, Canada.
Here he made a fatal mistake that set the stage for his subsequent failure.
His studio hired several traders and executives, but not risk control, which was still handled by David Chasman at his headquarters in Connecticut.
But there was no real time assessment of risk control for each trade, as there had been before. It was done more by computer, and David trusted Hunt too much.
In 2006, when Mr. Hunt moved to natural gas again, it was a mild winter and demand was low, keeping prices low.
‘We’re definitely not going to have a warm winter again next winter,’ Mr. Hunt said. ‘We’re going to have a very strong demand.’
So he started shorting gas contracts in the short term and going long gas forwards.
As of February 2006, he held 70 percent of the November short gas contracts on NYMEX, as well as 60 percent of the January 2007 forward long gas call contracts.
It shows how big his position was.
His daily profit and loss was in the tens of millions of dollars, and on a good week he made hundreds of millions of dollars.
He insisted that his judgment was right and wanted to make a big profit.
He earned another $2 billion for the company in the first four months of 2006.
But this time, fortune did not favor him.
Between late August and early September 2006, the forward price of NYMEX natural gas futures fell sharply, and Mr. Hunt’s short-short, long-long strategy failed.
Amaranth’s hedge fund suffered huge losses.
In mid-September 2006, Amaranth founder Nicholas Maounis said in an email to investors that the company was losing as much as $3 billion.
Still, he chose to keep trusting Hunt.
As it turned out, he had trusted the wrong person.
At this time, Hunt still does not admit defeat, he still thinks his judgment is right, as long as carry through this stage, can create brilliant again.
At this time, he has lost the ability of rational judgment, he not only did not reduce positions, but still according to the original strategy to continue to add positions.
By the end of September 2006, the fund’s losses had ballooned to $6.6 billion and it was forced to declare bankruptcy.
It took Mr. Hunt just over a year to make his mark on Wall Street and fall from power.
His saga was a shooting star over Wall Street, bright but short-lived.
What is the root cause of 02 warehouse explosion?
In fact, whether professional traders or ordinary retail investors, the source of the explosion is the same.
In Hunter’s case, we can see that he did make a lot of basic mistakes, such as not doing a good job of risk control, continued to add to the position even when the losses were heavy, and overconfidence and self-aggrandizment.
The root causes of his liquidation mainly lie in two aspects: first, he did not do a good job in risk control;
Second, the position is too heavy.
This is the same mistake most traders make when they get burned out.
At first, he ignored the importance of risk control, and as a result, he began to trade heavily, and continued to carry on and even increase the position when there was a big loss, and finally led to the explosion of the position.
This operation can be described in one word – ruthless.
Guan Hongzhi, who sold out eight times in the futures market, was also aggressive in the beginning.
He basically makes the opening to see the price rose immediately after the rise, fall on the chase, was set on the shoulder, fell on the position.
Positions are basically in 70%-80%, full dry situation also happens.
As a result, he got himself “black and blue” in the market over the years, with eight times of exposure alone.
In addition, it’s easy to make the same two mistakes in trading when you obsessively pursue a very specific goal.
Take Mark Weinstein, a Wall Street trader who in the 1970s set his sights on making $1 million and buying a chateau in France. The chateau he had his eye on cost $350,000.
To achieve this, he heavily invested in soybean futures and ignored the risk.
His daily losses were equivalent to a daily loss of nearly 10% of his net worth.
The pressure at the time almost drove Weinstein to a breaking point, and he once collapsed into his girlfriend’s arms, crying, and even thought about quitting trading altogether.
Many traders, including some of the biggest traders, blew up their positions because they were too big and ignored risk control.
It may be that traders themselves have little risk control and think that risk control is simply to set a stop profit and stop loss;
It may also be that traders themselves have a deeper understanding of risk control, but the system is not perfect, in short, there are still loopholes in their own risk control system.
In essence, there is only one reason for the heavy position, that is, the excessive pursuit of high yield, to get their own expectations or higher returns in a trade.
How to survive after 03 trading big shot?
In the above mentioned cases, it is not known whether Hunter rose again, but Guan Hongzhi rose again after 8 times of explosion, increasing the value of 15 million yuan to 100 million yuan.
Mark Weinstein didn’t leave the market altogether, but survived, becoming a highly successful trader for 80 months in a row.
Although their reasons for the crash were not different, they all learned different things from the crash.
In order to stabilize the generation of ruthless in the experience of 8 bursts, Guan Hongzhi’s mode of operation gradually stabilized, the force can no longer see, the situation of the full warehouse almost can not see.
In most cases, he is the first 15 percent of the capital to test the market, until he is sure that he is doing the right direction, the bottom position began to appear profitable before gradually increasing the position.
Eight blowouts taught him that the most important thing about trading is discipline, strict execution of a plan, and the management of funds and positions.
Position management is particularly important, if the beginning of the entry will use 30% or more of the position, and then continue to increase in the case of losses, it is easy to cause serious losses or even open positions, but also affect the psychology of traders.
To control risk, he took other measures besides position management.
For example, depending on the strength of the plate, hedging trades between different varieties.
For example, when agricultural products are strong and metals are weak, he will be long oil and short metals according to a certain proportion.
Learning to fear the market According to Mark Weinstein, one of the key things that enabled him to achieve 80 consecutive profitable months after his big run was learning to fear the market.
In the past, he was too confident that he could make a castle out of the market, blindly entered without analysis, and got tripped up.
He found that the most successful traders were the ones who feared the market the most.
His fear of the market forced him to choose the best time to enter. If he felt that the market was wrong or had no idea what was going on, he preferred not to trade that day.
Everyone takes away different things from the experience. Some people may learn nothing from the experience, fail to reflect on the experience this week, and then fail again soon after.
Many people understand the reasons for this, but many people still make mistakes again and again.
The root cause is the wrong mentality. Many people, even if they have gone out of stock, know what will cause them to go out of stock and then they may still do it again, just like Hunter in the first story.
Because the desire for money will make a person heal the scar forget the pain.
It is important to know that the nature of trading is a game of probability. Only with a deep understanding of this can trading profit and loss be correctly viewed. When you can correctly view profit and loss in trading, you will no longer blindly pursue the winning rate.
Foreign exchange burst how to remedy?
If you can’t fix your foreign exchange exposure, you should take a break. If you’re in bad shape, you’d better not do any more trading recently.
The main reason for the foreign exchange blowout is that traders hold heavy positions and do not place stop losses.
Foreign exchange high volatility and high risk, each fixed only light position, about one tenth of the margin or smaller, especially the position, in the case of unclear trend, can not be heavy.
Traders are not in the good habit of carrying a stop loss, and a light stop will never blow out.
