One of the mantras for foreign exchange dealing is to cut losses and run profits - yet that can be the hardest thing to do, writes Sheila O'Flanagan

Foreign exchange dealers were to the 1980s what the dotcommers were to the 1990s - young, brash, confident and able to deal with mind-boggling amounts of money without blinking an eye. Dealers communicated with each other via Reuters screens in txt tlk long b4 txt tlk was popular.

The media constantly ran stories about the massive amounts of money dealers earned and the even more impressive amounts they shifted around the globe. In particular, journalists enjoyed telling the public that forex dealers played the biggest gambling casino in the world.

The downside to all this was that most of them were burned out by 30 and were so stressed that they never had time to enjoy the rewards the long hours and big bonuses brought.

As always, the reality was slightly different. There were high-rollers who pulled in big business, made enormous profits for their banks and lived hot-shot lifestyles. But there were many more who never did anything extraordinary but, nevertheless, earned enough to guarantee a bonus that would cover a damned good holiday - but not on your own island and not accessed by your own jet. And many of my former trading colleagues are still dealing, despite having long since passed the dreaded 30.

Almost every guy I knew in banking wanted to be a dealer. Dealers were held in a great deal of respect by the rest of the bank. Not for them the shuffling of papers from "in" trays to "out" trays. Not for them the writing of interminable reports about customer targets. Not for them the task of having to be nice to customers who were being rude to you. Being a dealer meant you had freedom and autonomy. It meant you understood things that others didn't.

Being a dealer was great.

And, actually, it was. Clearly I wasn't the hot-shot, high-rolling type of dealer or I'd be e-mailing this piece from my secluded Bahamian hideaway by now. But I enjoyed what I did and, although I never hit the jackpot, I never got totally mauled either. Still, getting mauled is easier than you'd think.

People like to imagine that what happens is that you do a deal and suddenly all hell breaks loose, the markets go up or down, and you've made or lost a fortune. What actually tends to happen is that you do a deal and you assess whether or not the currency you've bought is likely to appreciate in value. Then you make a decision as to whether you'll hang on to it or sell it. It's that simple.

When you talk of "forwards" or "options" or any other means of hedging, you still have to make the same basic decision - "should I hold onto what I've bought, or sell it?" And no matter what kind of hedging mechanisms you have in place, if you buy a currency and it goes down in value then you'll lose money. If you've hedged it, you mightn't lose quite as much money. But if you get the call wrong, it's always going to be wrong.

The trouble is that when markets aren't doing very much and you're supposed to make money, you might decide to run with this position for a while, just to see what happens. If you start to lose on it, you might then be convinced that the downturn is only temporary. Indeed, you might have seen some research that indicates that the currency should definitely appreciate in the future. So you reckon you'll hang on in there a little longer and then, what the hell, you'll buy some more since the currency is now cheap.

It's rather like watching Eircom shares fall after you've bought them and then deciding to buy some more. It's called averaging down. You're holding more shares but the average price at which you own them is lower than the first price at which you bought them.

Now all you have to do is wait for them to go up again and rake in the profit. But the expected turnaround doesn't happen. In fact, things get worse. And while, for the private investor, this can mean staring a loss in the face and feeling really badly about things, for a dealer it can be a catastrophe.

It can be a catastrophe because dealers are meant to make money. They're arrogant and confident and sure they've made the right decision and they find it difficult to accept they've got it wrong. And the thought of their peers and colleagues discovering they've got it wrong can be almost too much to bear.

I remember feeling utterly devastated the day I lost £30,000 in a single trade. It's difficult to describe how worthless you feel when you've completely misread the market and how desperately you want to turn back the clock and change the trade. And when you've made a horrible loss the temptation is to do lots and lots of deals to make it back again.

Only then you're not trading because you really believe in what you're doing, you're trading out of desperation.

"Rogue trader" sounds like some arch-villain who plots and schemes to achieve his ultimate aim of market domination. Unfortunately, like Nick Leeson and (apparently) like John Rusnak, most rogue traders are simply people who got it wrong and weren't able to accept it.

One of the dealing mantras is to cut your losses and run your profits. Yet that's the hardest thing in the world to do. And, for a dealer who somehow manages not to take the hit from a loss-making deal on day one, it become increasingly difficult. The nature of dealing is such that people are given control over huge sums of money and those people are usually confident and successful.

If success begins to elude them the confidence starts to go.

Of course, as always, the drive for profit motivates the banks to demand more and more from dealers. I remember a chief dealer of my acquaintance telling me that the proprietary forex profits were the icing on the cake of the treasury department. Unfortunately some banks look at those profits as being part of the cake itself. And some dealers believe it.

But rogue traders are no more than foolish people who played with other people's money and lost. Just like dotcommers.