Preface - I am a profitable ETF swing trader of five years. I am now ready to take a sizable portion of my profits and commit them to LIVE FOREX day trading. (I have been consistently profitable on my I.B. simulator day trading a system I built, since Jan 2015.
However, the only wild card in my (long and short trade) system is how to handle a “Competitive Currency Devaluation” event. That is to say and event where the current value of one currency in the pair simply and instantaneously changes to a lower value.
It would seem that however rare an event it might appear to be, it is worth jumping through hoops to avoid. (just ask the dudes shorting USD/CHF earlier this year) Such an event would most likely destroy my account. Even without the use of margin.
My question, (yes it’s finally coming) - Has anyone over come this problem? (without the use of hedging)
Here’s what I’ve come up with.
My pair is NZD/USD (&AUD/USD) so the highest probable country in this pair to pull a CCD would obviously be NZ. (basically any country other than the U.S.)
So as long as I only take long trades I should be fine. Right? And although my system trades to a target, I have decided to simply pull up my safety stop once my target is reached and attempt to let the trade run. I use to set an actual target order which would obviously bar me from the windfall gains that would come if I was to find myself on the right side of a CCD. Or just a good sized run…
If you stay away from a currency where the central bank is continuously intervening to keep it at a certain rate then you should be able to avoid any sudden revaluation similar to what happened with CHF last year when they removed the peg. There’s virtually no possibility of this happening with EUR, USD, AUD, NZD, etc. given their freely traded nature. You can get sharp moves due to events such as Draghi’s ECB press conference yesterday which pummelled the Euro for a couple of hundred pips but that’s nothing that stops can’t handle if you happen to be on the wrong side of the trade.
It depends on your system really. If your time frame is small and you trade (take profit/stop loss) for not more than 100 pips, you’re immune to currency wars. If you go for larger time frames and larger pip count you just have to keep an eye on the central banks’ actions of the currencies you trade. If a CB signals devaluation don’t trade against it.
I traded ETFs and stocks before going into fx also. I was heavily effected by the USD/CHF event. What I have implemented to protect me going forward follows, they are options for your consideration:
1.) [B]Never take a position large enough to cause a 1% move in a pair to move your total account value more than 1%.[/B] I often take much smaller positions than that, but that is my ultimate maximum. There are many ways to generate such restrictions. Jerry Parker for example uses a minimum ATR in his position size calculations to prevent going over a certain maximum position size. He said that is what prevented him from taking any serious loss on January 15. My current biggest position is a short in EUR/JPY. My account moves just 8.4 basis points (0.084%) for any 1 percent move in that pair with this position. If that pair moved 20% against me (as did the CHF on Jan 15) I would lose 1.68% of my account. Some might say that you can’t make money with positions that small. But the truth is you can because you can take lots of small positions. All of this depends on your overall implementation of course.
2.) [B]Put only minimum deposits on account with your dealer.[/B] Suppose you have $10,000 to trade fx. I would put $9,000 of it in a bank account at home and send just $1,000 to my dealer. I can then trade on margin and put on positions based on the fact that I have $10,000. So if I want to risk 0.1% of $10,000 on a trade ($10), I will risk 1% of the $1,000 I have on account with my dealer ($10). If I end up with a group of trades that completely wipe out that $1,000 deposit on account with my dealer I will likely get negative balance forgiveness which was given to most of the negative balance accounts throughout the fx industry last January. In such a case my total loss would equal just 10% of my $10,000.
All three of these bits have become the backbone of my trading. I hope that gives some food for thought and if you have any new ideas I am down to hear them for sure.
Thanx for replying FV. It sounds like your saying all stop orders will be honored. (minus some reasonable slippage of course)
I am under the impression that during a “competitive” devaluation there is zero price discovery during the move. So stops won’t save you. All you have to do to lose big is be in the market facing the wrong direction when it happens. Stops will only exit you when the dust settles, way at the bottom. Not before. Except you’d already be wiped out if you were trading size/margin. Did your stops save you during such an event?
Thnx for your reply AOA. Very informative. I didn’t know about the NB forgiveness, but it makes sense. To expensive to take your totally wiped-out customers to court for money they don’t have that you didn’t lose…
t sounds to me like my idea of only trading in the direction of a probable CCD is the right choice for handling this problem, in relation to how I trade.
Trading one particular direction only to avoid a potential CCD is probably taking it too far. There’s currencies which are risk to these events and there’s currencies that aren’t. AUD and NZD aren’t given their freely traded nature where the market determines the currency value based on various fundamental reasons. CHF was at risk as it was being propped up artificially by the SNB every single day and there was always the risk that this could come to an end some day.
That’s not to say that the NZD or AUD governments couldn’t decide to slash their currency valuation at some point in the future but something like this would be telegraphed well in advance given that there would have to be some sort of economic upheaval which would require such a drastic change to how they manage their currency. Anybody long those currencies would have plenty of time to exit the trade.