đ„TRADERS BEWARE! Don't FALL into this TRAP!đ„
On August 2, 1990 Saddam Hussein took a very audacious trade
just like any typical high risk trader. Husseinâs trade was the invasion of
Kuwait. In fact, he had solid fundamental reasons for the trade such as:
By invading Kuwait, Hussein could drive up oil prices to Iraqâs benefit.
He also stood a perceived good chance of permanently annexing part or all Kuwaitâs oil fields, as well as gaining direct access to the Persian Gulf.
The invasion also provided a wonderful opportunity for Hussein to feed his obsessive desire for power.
In exchange for all this upside potential, the initial risk on the trade seemed limited even though he forgets to set a stop-loss based on the possible reaction of the United States. Not long after Hussein entered the trade, as usual the market conditions changed. President Bush committed the US to the defense of Saudi Arabia by sending troops and spear-headed the passage of UN resolutions aimed at convincing Hussein to leave Kuwait.
At that point, Hussein could probably have negotiated a deal in which he would have withdrawn from Kuwait in exchange for some good gains (a quick profit) but he decided to stand pat.
Next, Bush sent a stronger signal by doubling U.S forces to four hundred thousand. An action that not only indicate that the U.S was ready to defend Kuwait and face Hussein head-on. Clearly, the market had trend had changed but Hussein ignored the market signal and left things to chance.
So, President Bush gave him a January 15th deadline. At this point, Husseinâs potential profit was probably gone but he could still have approximated a breakeven trade by offering to withdraw from Kuwait. Once again, he decided to hold his position.
Once the January 15th deadline has passed, the U.S and its allies in the Gulf War embarked on the massive bombing of Iraq. Husseinâs original trade was clearly in losing territory. Moreover, the market was moving down sharply every day, as each procrastination resulted in more destruction of Iraq. But how Hussein give in now when so much had been lost?
Much like a bewildered trader caught in a steadily deteriorating position, he
pinned his hopes on the long shot. Unfortunately, Hussein finally capitulated. He
was like a trader who has held on to a losing position until his account has
virtually liquidated or return to zero.
Moral Lesson:
If you canât take a small loss, sooner or later you will take the mother of all losses.
No matter juicy offer a trade presents you, always have a risk management strategy in place.
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