The Chinese say, May you live in interesting times. This year the market started out the year with a few truly interesting backdrops. Among them a colossal trading loss that shook Société Générale to its core.
Did you know that Jerome Kerviel’s was the largest trading loss in history?
At least so far!
To provide some context about loss, here are the top 10 trading losses ever. At least, it can provide you with some perspective about yours 
Notice how all, except for one, were a result of trading in derivatives? The only equity loss big enough to make it on the board was $0.8 (by Friedhelm Breuers from WestLB, Germany) which ties for the last position.
Lesson? Trading derivatives is like juggling running chainsaws which also happen to be on fire. Unless you know what you’re doing, it will get messy.
Sure, these losses look unreal but each and every one of them started out as a small loss. The only reason why they are up on the board is they were allowed to balloon into grotesque proportions. So it is with the losses of us mere mortals. If we allow our convictions to overrule our discipline, we’re headed towards the same fate.
If anything, such gigantic losses should, for once and for all, put a damper on conspiracy theories of market manipulation. After all, if someone can’t bully a market with a few billion, then the market is indeed bigger than anyone and everyone.
| Name | Loss $Billion | Institution | Market | Year |
Jérôme Kerviel | $7.1 | Société Générale | European index futures | 2008 |
Brian Hunter
| $6.5 | Amaranth Advisors | Gas futures | 2006 |
John Meriwether
| $4.6 | Long Term Capital Management | Interest rate and equity derivatives | 1998 |
Yasuo Hamanaka
| $2.6 | Sumitomo Corporation | Copper futures | 1996 |
Wolfgang Flöttl and Helmut Elsner
| $2.5 | BAWAG | Currency and interest swaps | 2006 |
Robert Citron
| $1.7 | Orange County | Interest rate derivatives | 1994 |
Nick Leeson
| $1.4 | Barings Bank | Nikkei futures | 1995 |
Heinz Schimmelbusch
| $1.3 | Metallgesellschaft | Oil futures | 1993 |
Toshihide Iguchi
| $1.1 | Daiwa Bank | Bonds | 1995 |
David Lee
| $0.8 | Bank of Montreal | Natural Gas Options | 2007 |
Source: Wikipedia
What lessons do you draw from this?
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Trading losses are your best friends. If you are astute, what they take from you in capital, they can give you many times over in knowledge. That is if you welcome them and study them carefully. You gain money from profitable trades but wisdom from your losses.
Take a look at this chart from yesterday:
ENER spiked up in the morning with a wide range bar. That was a significant advance since it cleared it of short term resistance in the $33.50 range. The second candlestick was an inverted hammer but prices held at the top of the opening range. The third candle again took pice up to above the opening range. Things looked good. You even had the 5 minute moving average (blue line) acting as support.
But if you took the trade as price broke above this little flag that had formed, you would have lost money. Price soon weakened and headed down for pretty much the rest of the day.
So what happened? why did it fail?
UPDATE: The charts that I had for ENER where a little off. To be more specific, the second and third candles where not accurate. They were corrected. As you can see, there are two back to back dojis right at the top of the opening range.
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