Very big event, where you cannot sell to your stop-loss, does it happen?

Trading Discussion
1

Hi,

I am using a (so far) successful strategy, where I follow trend and only trade EUR/USD when everything look right. I have developed my own indicator for Metatrader, that shows me when I am “allowed” to trade, which is based on trend, volatility and time of day and weekday. I usually trade for 10-15 pips, with a stop-loss of 5-6 pips.

Following this system, I get a very good return and I think to myself “what can go wrong”. I can trade both long and short, so there are really no bad periods either. I say to myself, it cannot be true that I get 10-20% monthly return almost without risk.

So now to my question: How often does it happen some kind of “catastrophic” even with EUR/USD that make the pair move so fast so I will not get out on my stop-loss? I trade with 30:1 leverage, so a sudden 3% shift would basically wipe out my account, if it happens so far that my stop-loss cannot be executed. I use AvaTrade… Can it ever happen such a news/event so that EUR/USD move so much in milliseconds?

2

You’ve probably already elected to stay clear of the market during the run-up and aftermath of calendared news event such as FOMC, NFPR, ECB etc. You must also be avoiding holding over weekends and after the NY close / before the London open.

But I’ve found that orders or stop-losses are triggered automatically if price gets to the given level faster than I could have executed them manually. Its possible price could go far beyond your stop before the order is triggered but I would have thought it unlikely. Might be worth entering some SL’s on test positions and watching how fast the reaction is.

A very short duration move of 3% on the EUR/USD is massive, considering its current ATR20 is only just over 0.5%, and therefore very unlikely. But nobody can guarantee it won’t occur. Maybe you want to pay for a Guaranteed Stop-Loss?

3

Thank you very much for the reply, tommor. I understand that it is unlikely.

I made a check of the maximum move of EUR/USD historically:

  • Max move in 1 minute since June 15 is 0.35%
  • Max move in 5 minutes since October last year is 0.49%

I did not know you could pay for a Guaranteed Stop-Loss, does most brooker offer that?

4

Mostly they will offer it because its a good earner for them - GSL’s are expensive and you have to pay a significant premium up-front: this is non-refundable so if you exit the trade with a profit or a smaller loss than your SL loss, you don’t get it back. Usually you can’t adjust it either so it can’t be used as a trailing stop. Too expensive for most traders to bother with.

5

Yes @Animap, dramatic price changes in a major currency can happen as a result of a geopolitical event or central bank action such as what happened with the Swiss franc on January 15, 2015: Can I lose more than my deposit?

6

It’s not likely event since it’s pretty much liquidity on EURUSD, even during Asian trades. Though it can happen on crosses or exotic pairs, especially in USD/Emerging market currency, which are under threat now because of sharp upside dollar moves

7

Thank you all for valuable information in this thead. I was not aware that you may get get a negative balance (and could be required to deposit more to cover the loss). So I checked the small print at my brooker AvaTrade, and atleast that one says:

13.9 We provide you with negative balance protection for your Account. This means that your losses can never exceed your Equity.

Thats good. But trading with a very large leverage with a brooker that does not provide this protection is really risky. Lets say you have a 100$ account and trade with 200:1 leverage without protection against negative balance. if there is a catastropic event and your pair goes 5% against your direction (and stop-loss cant execute in time) you would be required to put in additional 900$ just to cover the loss!

1 Like
8

Hi @Animap,

You are correct about the risks of personally trading with extremely high leverage, since it magnifies gains and losses. However, that is only part of the risk of trading with a broker that offers extremely high leverage to clients.

It’s important to understand that the risk you personally choose to take on as a trader is not your only risk when trading forex or futures for that matter. In markets like these, where traders use leverage, you must consider the financial responsibility demonstrated by your broker.

Margin requirements should be set by regulators and brokers (and in the case of futures by exchanges as well) by taking into account the perceived risk of a given currency pair. That’s why you will sometimes see them raise margin requirements due to heightened risk from geopolitical concerns.

Is it wise to trust your money with a broker that offers 400:1 leverage to other customers (even if you don’t use that much leverage with them personally) with no regard for the potential risk to the firm or its clients? The danger to you, if such a broker has not required adequate margin from its clients for the risk they take on in the market, is that your own money can be at greater risk due the losses incurred by other traders and your broker.

Even if such a broker previously promised they would never hold you personally responsible for any negative balance you might incur, you could find yourself in a position where the money you deposited with them would be at risk because of the losses incurred by the broker itself in offering extremely high leverage to clients. In other words, you might not be able to withdraw money from your trading account with that broker, because too many other clients had negative account balances.

“Only when the tide goes out do you discover who’s been swimming naked.” - Warren Buffett

9

Thanks for all replies, I found that rather large event do happen. Here is an example:

https://www.forexcrunch.com/draghi-downplayed-eurusd-flash-crashes/

The EUR/USD down with 70 pips in less than one minute. This is after 3 hours of slow/calm uptrend.

If I were long, and had a stop-loss of 1.1365 in this case (10 pips below the start of the fall), what would happen. Is it probable that I can get out near the stop-loss or would it slip all the way down? With leverage 30:1, that would mean more than 20% of the account was wiped out.