A Lesson on Relativity


Risk is just as relative as everything in life. You have the illusion of having time, but you don’t.

You sit up for the notion of setting stop losses, and thinking that your capital is protected. It isn’t. To hold a position into the weekend carries an enormous risk for instance, and it can cost you all of your risk capital if things take an unexpected turn.

The earlier you realize that all of the money is at risk that you put in on a bootleg brokers account, the better off you would be.

I opened an account with a Russian broker once – when I was merely trying to open a demo to find out what their spreads were like. I got a phone call later that was almost threatening: “You opened an account with us, we are waiting on your next move” – they told me. I would never expect that they would care to pay you out any gains even if your account would show them to exist. Who are you going to turn to for justice? Your mommy? Whom are you going to sue in case of an offshore broker say on the Marshall Islands?

You would find that despite all of your efforts, having a pending order placed for a hedge with the broker – to eliminate the event that you go offline, i.e. during a power outage or if the internet provider goes offline, your safety isn’t assured.

One of the brokers I have an account with goes offline during the morning hours quite frequently and does not even feel like they have to apologize for it. I guess the attitude is that people would blame their cell phone connection / provider. But I have multiple accounts with other brokers and I can see that they are on; plus I can log into my home computer remotely and look at the terminal’s journal where it would say “unable to connect”. Other times your app would come back with “common error”. Anything can happen when the market is open even in the matter of minutes, let alone when you are unable to make any changes for hours.

One time I had to phone up the broker when an account went into red lining (margin call, not margin cut) – they claimed that they sent out an email – which I never saw (blaming a French vote taking place during the weekend), and arbitrarily they took away the leverage on a Friday, which meant the 1:300 became 1:50 and the account that was fine got rendered into being under margin call when you are unable to hedge. I had to get them to temporarily re-apply the hedge so to be able to take on a hedge, but as you can read out of this, there are a lot of ifs, and ultimately this poses another risk factor that can cost the account itself. Brokers have the tendency to utilize men made chaos to turn it into a payday for themselves.

So, what is the answer to all these? You need to choose the broker well. You mustn’t use stop losses unless you feel like volunteering for losses. You need to have a hedging system in place instead, that can save your ass, and all of these would account for nothing if do not manage to develop close to perfect senses to what market you are in and be able to anticipate / acknowledge turns incredibly well.

Brokers sometimes do not acknowledge your stops either. I read someone’s story that when the Euro peg was released by the Swiss Bank, and they moved against each other by 42%, he got stopped out from his USD/CHF position with a 10% loss, and was happy with his broker. Others were not as fortunate, and their brokers did not cut their losses until losing 25-30% on the same trade.

Is this an impossible quest then? Not, but it would certainly cost you anything you are willing to give and more. If you are lucky, then you come across somebody like me, whom can spare you losing everything, for I have been through it all, and I managed to learn and develop things for it.

Now, let’s compare quickly the average Joe putting on these perceived risk/reward trades trying to catch the big fish with someone who has a philosophy of “getting some”.

If you listen carefully, you may end up understanding how Capitalism works.

Exhibit A, your so called proactive trader gets very good at his/her game and manages to make some money by the end of the month, in the neighbourhood of 5-10% relative to their deposit size. He constantly volunteers for losses.

Exhibit B, the frequent hedger guy does not get every turn right, and may get called into partial / half / oversized / full hedge, starting from 15% relative draw down, but in return, always ends up making something, very often is holding counter positions that takes away some or all of the risk, has control over when to take a loss, and his objective is to gain equity faster than it is moving away from him. He makes money every day, but to be able to pull out funds, he would have to get very good at recognising and catching the turns – and be not afraid to take smaller losses if that prevents further draw downs. Mr. B can make on his high leveraged account (1:500) 50%-100% gains per week. If things go well, he can take out all of the gains biweekly or so. His risk went to zero relative to the risk capital on the second week of trading: he got his capital back. Now all he has to do is to repeat the same thing 25-50x more that year, without forgetting to take out at least some of the gains when the account has no holdings (open positions). There is a size limit that despite of greed the account should not exceed, which derives from the broker imposed maximum lot size. Once the broker can deny you the ability to hedge, you would lose your edge and you do not want that.

You can also begin understand now that in Capitalism, production, even money production should become more and more efficient over time, and the overall risks would drop further, for the risk capital’s increase would fall short from the increase of the wealth.

A relevant comment from my pal, Dutch:

Had a run in with a binary broker out of Nicosia, Cyprus years ago. Ran $500 to $43,800 in 45 days. Asked for my money. NO response. Finally, called them. Bunch of Russian gangsters but FUCK them. Told them they had 72 hours to get me my money or me and my crew of ex-Marines would board a plane, first to Brussels to lodge complaint with any regulatory body. Then, we were flying down to Cypress for a man-to-man conversation and the outcome would NOT be pleasant in the slightest. Got my money in 48 hours. Nothing worse than waiting for a wire out of some fucking Bulgarian bank.