The inspiration from today’s post comes from my upcoming trip to Australia. I have been keeping an eye on the AUD/SGD exchange rate, and the AUD has been falling and falling. A quick check on Google shows AUD$1.00 going for SGD$1.03, which is pretty awesome since I’m scooting off next weekend.

Along the way, I came across a couple of articles with case studies on the fallout from the Euro/Franc disaster. The Swiss National Bank had been maintaining a floor – basically a minimum exchange rate of 1.20 Francs to 1 Euro, and not allowing the Franc to appreciate any further.

This arrangement prompted many “investors” to take advantage and bet on the Euro. After all, there is a 1.20 floor to fall back on, isn’t it?

The World Came Crashing Down

On that fateful day, 15th January 2015, the floor simply disappeared. Many individuals lost everything they’ve got over a seemingly innocent, little bet.

Swiss-Franc
Source : Goldman Sachs Group Inc

Mr O’Comartuin – who asked to be identified only by his Gaelic name – suddenly faced a loss of nearly £280,000. He said: “I got a text message. I was talking at the front of class, gave the children some work to do. Then I got the text, and went to look at one of the computers at the back of the classroom. My first reaction was that there had been some kind of computer glitch. The children were working away, my heart rate was going at 200 beats a minute.”

Mr O’Comartuin bet the euro would gain against the Swiss franc and stood to make £100 for every one-hundreth of a cent – one “pip” or basis point in the parlance – move in his favour. But instead the Swissie soared and the euro had fallen to €0.925 against the franc. That left him with 2,770 pips of losses – each costing £100 – and a bill of nearly £280,000.

Is 1:400 leverage simply madness? Will a stop-loss order save you?

Just to be prudent, Müller set a stop so that his broker would automatically sell the contract on the market if the euro fell below 1.1998 francs. But when the SNB announced that it had removed the peg, no one was interested in taking the other side of that particular bet. The euro fell to 0.92 francs before Müller’s broker was able to find a buyer, and by that time he had lost nearly a hundred times what he put into the deal in the first place.

Not taking liquidity into account is an understandable mistake for an individual investor, but easy access to extreme amounts of leverage transforms it from a painful mistake into a life-altering one. A €2,800 on a contract for difference turned into a €280,000 loss.

Can This Happen In Singapore?

Of course! Countries have different limits and Singapore, like the US, have the leverage limit set at 1:50. Even so, some financial institutions prefer to flaunt leverage as almost always a good thing. Check out this paragraph I lifted from the website of a bank that operates in Singapore.

Benefits of forex trading
There are several advantages to forex trading. These include:
Leverage up to 50 times. Forex trading allows you to leverage up to 50 times. For example, an initial cash outlay of $2,000 will allow you to trade up to $100,000 in contract value in the forex market.

As one Chinese proverb goes : 水能載舟,亦能覆舟. Not only can water float a boat, it can sink it also. Never assume. Even if you have done every imaginable checks to ensure the perfect condition of your boat, one can never tell when the perfect storm is stirring.

More Than Index Investing

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