Black Swan event

I’m a newbie. I understand the mechanics of FX trading and am currently evaluating trading strategies. After developing a trading plan, I plan on testing a few trading strategies in a demo account.

I recently came across a phenomena called a “black swan event”. The most recent event occurred in 2015 when the Swiss National Bank removed its peg of the EURO resulting in a crash in long positions of the EUR/CHF, the USD/CHF etc. Many FX accounts were left with negative balances and some brokers almost went under. Although very rare, a black swan event can result in catastrophic consequences. Since stops won’t protect you, what will? The possibility of a black swan event is giving me second thoughts on pursuing FX trading.

I don’t use them myself, but there [I]are[/I] such things as guaranteed stops.

They would still perhaps leave you exposed to the risk that the [I]broker[/I] might go under (though some countries, depending on their regulation, also have government-backed guarantees against that occurrence), and “black swan events” are typically times that that might happen, if ever.

Ultimately, it isn’t possible to remove all the risk from trading - one simply has to construct the safest way one can, given all one’s own circumstances, to protect against risk.

It’s certainly true that trading spot forex, through counterparty market-making brokers, is comparatively high risk, in general trading terms.

And welcome to the forum.

Hello lexys,

Thanks for the welcome and reply.

Although this sounds incredible regarding the 2015 black swan event, I read that trades were being executed 1,000 pips below their stops!

Hi, ntmiami and welcome to the forum. Like Lexys stated, unfortunately we can’t set the trading risk to 0. And these guaranteed stops are usually offered by market makers which we all know are not honest and transparent brokers. However most regulated brokers do offer negative balance protection which in events like the “black swan” could be rather helpful. So make sure to open an account with a fully regulated broker which has no DD.

A few other ideas.

Don’t trade any pairs that have a pegged currency. If you aren’t trading it, then when they remove the peg it won’t affect you.

Only use low effective leverage. Although my broker allows a maximum of 100:1 leverage, I will only ever use 10:1 maximum. Most of the time my effective leverage is 5:1 or less. That way if you do get caught in a big move, it will greatly minimize the impact.

Well this is theoretical question for an event that no one can predict. It is barely possible to prepare yourself for such thing. Like what will happen if JP Morgan, Bank of America and Barclays go bankrupt at the same time :slight_smile:
The good part since 2015 is the like sebastiano mentioned, that most of the broker now have negative balance protection (they were forced to do it but that is not our business lol ), e.g. you cannot lose more than you have in your account. Once you make some profits and withdraw it to ensure decent ROI you could be reliеved that if an extraordinary event occurs it will not blow off all your efforts (and invested money).
So don’t give up just because of the worst possible scenario and give FX trading a chance if you are really interested in it.
Cheers and good luck.

I agree really, you can’t really lose more than what you’ve got in your account. So the principle; always take out you profit and leave something you can afford to lose!


Always read the small print

That’s not strictly correct. When the Swiss depegged from the Euro it affected many other pairs. Euro pairs were hit hardest, but other correlated pairs suffered as well, plus other instruments gained as they were deemed safe havens

Very true, thankyou for correcting me. It’s probably more accurate for me to say that:

“If you aren’t trading it, then when they remove the peg it [U]hopefully[/U] won’t affect you [U]as much[/U].”

I also noticed that Brexit caused some larger moves and spreads on pairs other than GBP and EUR too.

Oh well, we can only do the best to reduce any risk but it’s never going to be possible to completely eliminate it.