What Traders MUST Learn From The Collapse Of A Popular Trading Website And Loss Of $1 Billion

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There is an old adage in trading, “if it’s too good to be true – then it’s too good be true.

It was the first thing I thought of when I read the headline earlier today that “A Popular Currency Trading Website Has Vanished, And $1 Billion Disappeared With It.”

Indeed the the original story said that the site claimed, “investors had averaged net gains of 1 per cent each trading day during the past five years.” But they did happily add that, “those average gains of 1 per cent daily couldn’t be compounded into an annual return.”

Likely the site said somewhere also that ‘past performance is no guarantee of future returns.’

But to put that 1% per day in perspective the average return on the S&P 500 since 1949 has been 9.05% – per annum!

But as ridiculous as these returns sound to someone like me who has been trading for a quarter of a century a lot of people have been sucked in by the hype, marketing and no-doubt chicanery of this and other such businesses over the years.

It looks like a ponzi scheme.

1% per day – doable some days sure, with a bit of judicious leverage or some solid news on the stock market or on a stock. Sometimes doable in FX when we get big moves like those precipitated by BoJ Governor Kuroda’s shock and awe a few weeks back of other Central Bank interevention.

But 1% per day, each day for 5 years in a row? Not going to happen.

The odds of flipping heads on a fair coin is 50% for each toss. Flipping two in a row and it drops to 25% once you get to 7 heads in a row the odds fall to less than 1%. 10 in a row? Less than one-tenth of a percent and 14 in a row? less than one-one-hundreth of a percent.

So the roughly 1250 days – 5 years – of getting the market right every single day without loss is infinitesimally small. Add to that the chances of the return being 1% each and every day and you see the problem with the claim.

As we now know the site has disappeared and the testimonials were done by actors.

But people got caught up in the hype they wanted to be rich, drive fast cars and live in luxury.

One trader, David Kane, who put in $500 “as a test” and then pulled it out “to be sure I could get it back” told Bloomberg that when he got his money back, “I almost kicked myself in the ass for pulling that out, because that’s $500 more that could have been earning me 1.21 percent per day.”

A couple of months later, and after the site had collapsed he was far wiser.

“We suspected it was too good to be true. I’m glad I pulled out $500. What is most bothersome is the loss of the dream.”

The dream!

Forget the dream, forget the fast cars and easy money.

Trading is a business like any other. It’s fun and I love it. You can also make a good living and be very successful – some do but most don’t.

But if there is one takeway from this fiasco of the collapsed site and missing $1 billion in clients funds it is that Gordan Gecko was wrong.

So wrong.

Greed is not good, greed is not right. Greed for all traders is a deadly sin.

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