When I was still in Risk Management
we had to appoint a trader to the IRS desk. We decided on a Russian
candidate but he would only come if his trading buddy came with so we
made them a deal and they started.
Now these two guys had absolutely different personalities. The blond one had the ability to bleed the bank to death with small daily losses continuing over an extended period while the russian had the ability to kill us by cutting the throat of so that death is immediate, he had the habit of taking huge punts and it either worked out or he cut his position..
See the Russian guy was purely relying on his interpretation on where interest rates should go given the current economic climate at that time. During his first year with our bank he made a very nice profit and almost half of the entire bonuspool for all employees at the bank was paid by his profits so he was a star as far as everybody was concerned.
He decided to compliment his entries with technicals and got a book by some Murphy guy. He was like a child and just explaining to me about this divergence thing on the MACD's. I was also very impressed with all the examples and found it very interesting.
He started using "reverse divergence" to time his entries. Needless to say it was a BEAUT! Until the market forgot what it had to do when the trader experience "reverse divergence". As this trader was never faced with a trade not working out he was of the opinion that it will come-back sooner or later so he kept the position. A week of sideways movement proved to him that the market is definately not going against him so he added to the position. The same happened a few weeks in a row and he developed quite a position. I warned him that his position is starting to make me a bit uncomfortable - he showed me the charts and his analysis and I showed him his position and Value at Risk figures. He compromised and cut-back. The very next day the market started going his way and in a big way! He made a bundle and a half on that one trade. His response to me was that if I allowed him to keep his full position he would have made much much more and I am hampering his trading efforts by being too strict in applying agreed upon limits etc.
Move a few months into the future and the same setup occured with the same initial drawdown and adding to his position. We again had the same conversation about being too large etc. He pointed to the previous time I made him close some positions and I decided not to waiver from the set limits. He refused to cut his position so I called in the Treasurer and explained the size etc... The Russian had to undertake not to increase his positions. Then the market started going against him - he added a bit more hoping for the bounce.
Bottomline is: two days later he wasn't shaving, shi t ting or eating. He was in deep and knew it. He called me and the Treasurer and said he doesn't know whats going on he want's to cut his position but he is so large in it that the market can't carry him if he started closing positions. I showed him our hedging portfolio with the documentation on it and the necessary signatures to allow our actions and started hedging procedures to get him out. The smile and relief on his face was unbelievable! He was so happy he could jump to the roof. He wasn't allowed to trade to that size again and he stayed at the bank only for about another 3 months. When he saw there won't be any bonus coming his way he decided to move to another employer.
He didn't bankrupt the bank but basically lost all his previous profits for a zero sum year!
Now these two guys had absolutely different personalities. The blond one had the ability to bleed the bank to death with small daily losses continuing over an extended period while the russian had the ability to kill us by cutting the throat of so that death is immediate, he had the habit of taking huge punts and it either worked out or he cut his position..
See the Russian guy was purely relying on his interpretation on where interest rates should go given the current economic climate at that time. During his first year with our bank he made a very nice profit and almost half of the entire bonuspool for all employees at the bank was paid by his profits so he was a star as far as everybody was concerned.
He decided to compliment his entries with technicals and got a book by some Murphy guy. He was like a child and just explaining to me about this divergence thing on the MACD's. I was also very impressed with all the examples and found it very interesting.
He started using "reverse divergence" to time his entries. Needless to say it was a BEAUT! Until the market forgot what it had to do when the trader experience "reverse divergence". As this trader was never faced with a trade not working out he was of the opinion that it will come-back sooner or later so he kept the position. A week of sideways movement proved to him that the market is definately not going against him so he added to the position. The same happened a few weeks in a row and he developed quite a position. I warned him that his position is starting to make me a bit uncomfortable - he showed me the charts and his analysis and I showed him his position and Value at Risk figures. He compromised and cut-back. The very next day the market started going his way and in a big way! He made a bundle and a half on that one trade. His response to me was that if I allowed him to keep his full position he would have made much much more and I am hampering his trading efforts by being too strict in applying agreed upon limits etc.
Move a few months into the future and the same setup occured with the same initial drawdown and adding to his position. We again had the same conversation about being too large etc. He pointed to the previous time I made him close some positions and I decided not to waiver from the set limits. He refused to cut his position so I called in the Treasurer and explained the size etc... The Russian had to undertake not to increase his positions. Then the market started going against him - he added a bit more hoping for the bounce.
Bottomline is: two days later he wasn't shaving, shi t ting or eating. He was in deep and knew it. He called me and the Treasurer and said he doesn't know whats going on he want's to cut his position but he is so large in it that the market can't carry him if he started closing positions. I showed him our hedging portfolio with the documentation on it and the necessary signatures to allow our actions and started hedging procedures to get him out. The smile and relief on his face was unbelievable! He was so happy he could jump to the roof. He wasn't allowed to trade to that size again and he stayed at the bank only for about another 3 months. When he saw there won't be any bonus coming his way he decided to move to another employer.
He didn't bankrupt the bank but basically lost all his previous profits for a zero sum year!
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