Well I’ve been having a good day watching some of the above.
At the end of one of the above the below was suggested by YouTube so I ended up watching it. It’s about the flash crash of 6 May 2010. And this got me to thinking: what would happen with the TPS vs. another trading system that required stops. In addition and possibly even more importantly: how would my risk based position sizing play out vs. traditional position sizing. And here’s my findings.
Let’s assume that on 5 May 2010 you went long the Dow at the close @ 10 866.
A traditional (let’s call it that) trading system and that would have you place your stop at the low of the same bar which was 10 814. Assuming the same risk of 5% of your account of $55 000 USD this would allow you to have gone long 52 lots or contracts @ $52 USD per point movement.
With the TPS and using risk based position sizing and with the same amount of capital you would only have been able to go long 4 lots or contracts. Your soft stop would have been at 10 178.
So here’s what could have happened:
The Dow tanked by 1 000 points from its open on 6 May 2010 to its low after which it took a few minutes to recover from the low.
With the TPS you either would have manually closed out at for a loss of 5% or $2 750 USD (had you been sitting watching) OR your loss would have spiked to $4 000 USD but eventually priced crept back and closed at 10 520. Lo and behold: on 10 May 2010 the trade would actually have closed out at a profit (not going into detail as to why but take my word for it or study the chart on Yahoo Finance). So: a loss capped at 5% or a profit after the flash crash.
Now the other scenario of a traditional trading system. The chances of your stop loss being executed at the price at which it was set are absolutely NIL. It would have been slipped on that day. Exactly how much we will never know. Worst case scenario: you would have been margin called because at the low your loss would have been $52 000 USD (remember that margin would be in use and you may even have other trades open using up margin). Alright: this probably would not have played out that way. Your stop would probably have been executed at SOME point during a pause on the way down. But you can be almost sure it a) would have been at a far far worse price thus resulting in a sizeable loss by far exceeding 5% and b) you would have been out of the trade period.
Now it is true that since 2010 circuit breakers have been introduced. In other words: the markets can only fall certain percentages (or climb for that matter) before trading is halted. But it is worth mentioning that the flash crash would still not have been prevented by these circuit breakers because on a percentage basis the fall was not enough to trigger them. Furthermore: once a circuit breaker has been triggered trading is halted. So even if you’re no sitting on a huge loss and wish to close you simply are not able to do so and will have to wait for trading to resume. (https://en.wikipedia.org/wiki/Trading_curb)
Not only does the above demonstrate a) how the TPS would hold up under an abnormal condition and b) the merits of trading with little to no leverage (at that time high leverage was the norm so it would have been no problem to open such a lot size with such capital) and c) the robustness of risk based position sizing as opposed to the traditional fixed stop method.
Now I do not know if the same would have applied to the EURCHF crash for the simple reason that I do not know if price simply jumped from its closing price the previous day to that low that occurred (I think this was actually the case). But after checking the chart and assuming risk based position sizing: I do not think you would have been margin called and price retraced after the spike down (but I cannot say for sure). From the documentary the Dow basically tanked in 100 and then 200 point increments on that day. So you would have been able to get out had you been watching and at the same time at some point the stop from the traditional trading system would have been executed (although there is no way of telling at which point of course). But do note: the circuit breakers described above do not apply to FOREX.
Anyway. As I say. Interesting.
In the documentary though: HFT is discussed again of course. And much of the technology is described. As i noted on another thread: why retail traders believe they can trade the news is absolutely beyond me. Information is given as to how the data centers for the big banks and investment firms are conveniently located in New Jersey given it’s proximity to the NYSE. This is for nothing other than speed. By the time your retail broker is showing price those firms are already getting out of the trade.
In addition: just take a look at the investments made in HFT technology and automated trading. But we have on sites like this EA creators that think they’re able to beat the market with huge gains. It is beyond me. And frankly: it comes from nothing other than ignorance. Amazes me that some talk about “passion” for trading. And yet I will guarantee you that not a single one has spent even a few hours learning about stuff like this.