Many traders ended their careers over the last few days. I’ve read posts from people who only deposited a small amount, and now may lose their house.
For those of us who survive, what lessons do you think we can learn from this debacle? What can we do to minimise the risk of future ‘black swan’ events?
pure luck or genius risk management can handle this event. Even big brokers like FXCM and Alpari got dramatic loss, i knew stop loss cannot help. only hedging funds by genius.
I think that players in this game must assume the possibility of a total wipeout at any time. A skilled trader can make his retirement in a year. A skilled carpenter must work his entire life. There simply must/will be sharp drawbacks to anything that can “make” you so quickly.
I believe that there is something to learn from this.
After Alpari shut down yesterday I was suddenly “unemployed” due to frozen funds.
I lost nothing to any trades under the event, but I can’t at the moment get to my funds and withdraw/transfer them to another broker and trade again in the nearest future.
I read in the paper here (Norway) yesterday that 12-1300 clients from one small local bank alone had their mortgages in CHF and that they stand a loss for over 100 million USD and now may loose their home. That is ONE local bank. How do you think the chainreaction over the world will turn out?
Many wealthy people literally hit rock bottom and are left with dept… Even I who actually lost nothing but my broker didn’t sleep well last night.
I have asked myself the same question over and over again for the last 48 hours… What can I learn from this event. How can I protect myself even better against events like this.
The first thing that comes to my mind is to lower my leverage significantly.
Second thought is to take a good look on which brokers survived this Black Swan and WHY they did it. What is their solid foundation that made them trade another day, while others went bust.
What made them survive is characteristic I will go after when choosing a new broker.
Third point… I might think that I will split my trading fund into at least 2 brokers independent of eachother. In that way, if we should excperience simular events one or more times and I get my funds frozen theres is a 50/50 chance that one of the broker will survive and that I’ll at least can continute to trade and generate an income.
Thats where I’m at in my process right now…
And oooh…I will never put my mortgages in a foreign currency… I dont even think that I will ever have a mortgage. Whats paid for, is yours
One thing, well three things I’ve haven’t heard alot talk about yet but are probaly critical to protect one’s account are exposure, diversification and asset management. IMO these three core issues should be planned in detail your business plan.
take note of brokers changing their leverage with certain pairs. If they’re reducing leverage, that means they are scared, and so should you.
spread your money amongst different brokers. If your funds are frozen or lost in one broker, you can still trade or withdraw from your other brokers.
only deposit enough money with your broker/s to provide margin and cover short-term drawdown. There’s no point in keeping excess cash with a broker.
trade with a broker that will protect you from negative equity. I’ve been reading horror stories of traders going into negative equity and owing $100k+ to their brokers. But I understand there are some brokers who will forgive or prevent negative equity (e.g. Oanda).
regulated brokers offer better protection than non-regulated brokers as they may be required to segregate clients’ funds from operational capital, financial authorities may insure deposits etc.
[B]Ways of reducing catastrophic losses:[/B]
Use a wide stop loss. Any slippage becomes relatively smaller when your stop loss becomes wider. e.g. a stop loss of 20 pips with slippage of 2000 pips is awful, and most likely fatal (you’ve lost 100x your initial risk). A stop loss of 500 pips with 2000 pip slippage is probably survivable (you only lose 5x your initial risk).
Risk a small % per trade. If you risk 1% with a stop loss of 500 pips and you endure a 2000 pip slippage on your stop loss, your final loss is 5% (survivable). If you had risked 10%, you would’ve blown half your account.
[B]Ways of dodging catastrophic events:[/B]
minimise the time that your trades are open. e.g. if you’re swing-trading all the time and have positions open 24/7, you WILL run into the next “black swan” event. On the otherhand, if you trade short-term and only have positions open for 10% of the time, you have a 90% chance of dodging the next “black swan”.
[B]Ways of avoiding ‘black swan’-prone pairs:[/B]
Avoid pegged or manipulated currencies, especially if it’s trading along the floor or ceiling of the peg (CNH, SGD, HKD and DKK come to mind)
Avoid emerging-market currencies, as a political crisis such as an overnight coup can trigger massive volatility
Stick to currencies with a history of minimal/moderate intervention from central banks
Am getting sleepy as I just finished work today, so I’ll try to expand this list tomorrow (I’m literally falling asleep at my keyboard).
Do the things that you can control. One of it is picking a good broker or two. Most of all, Personal financial stability is a must inorder to protect yourself and your family no matter what happens in the market. That is why it is foolish to fund your trading account on credit card or any forms of debt specially in trading. If you don’t have money in savings to fund your trading account, save up and don’t put every penny on this account…Stay out of debt and save. When you have money in the bank, you can always get back in to trade . You can pick up the pieces where you left off but if you don’t have any fund… Stop trading…and don’t quit your day job just yet…
Always do what is best for you and for your family…
While I am sure your intentions are good you are contradicting yourself.
You suggest to use wide stops and then go on to suggest to limit your time in the markets.
If you use wider stops you will have to give the markets more time to move before it makes sense to trade from a RR point of view especially as you suggest having a 500 pip SL (which I personally think it nonsense unless you only trade the weekly timeframe or something similarly silly).
In order to limit your time in the markets you will have to decrease the stop size.
Limiting your time in the markets is not going to protect you either as you would usually want to have your positions on around UK open time as this is where most of the larger moves occur and it was only a few hours later that the SNB announced their move.
In my opinion there is NOTHING to learn from this that you can personally have any control over other than not trading currencies that are not dynamic i.e. artificially linked to another currency (which was the exact reason I wasn’t trading CHF pairs even before this event).
I agree with what you say on a general basis however it wouldn’t have helped you much in this situation.
Say you had a 20 pip SL and risked 2% of your total account that was worth 100.000$ (that 100k is money you can afford to risk).
Price moved 2000 pips against you and now all of a sudden you owe your broker 100.000$, so while you could afford to risk the initial 100k you have now lost that and lost another 100k which you might not be able to afford.
You’re wrong with your conclusion. You can learn something from Thursday and all the Thursdays to come and don’t ever believe nothing like this will ever happen again. Anyway this is what I learned. 1. You may not have any way to avoid what happened Thursday, but you can protect your bankroll by limiting the amount you keep with one broker. If you have $50,000 bankroll and bet 1 lot, put 25k with one and 25k with another and instead of betting 1 lot, bet 2 mini lots. 2. Don’t procrastinate, take action. Don’t put off protecting your bankroll until something major happens and you lose it. 3. Never confuse cost with value. I think if we asked any trader who lost $30,000 and up, if you knew that Thursday was going to be a disaster and your broker may have to claim bankruptcy, would you rather have all your money with that broker, or 10k with that broker and two others. (Stupid example I know, but just trying to make my point.)
I did not trade Thursday because none of my pending trades triggered. However if my account was with a broker who claimed bankruptcy,. . .:17: We need to protect protect and protect. Especially if are or expecting to be a full time self employed retail trader. The only thing that bothered me more than see what happened to retail traders on Thursday, was having to listed to the mutual fund hustlers on all the business TV channels telling the audiences that nothing like this could happen with mutual funds, only to retail currency traders. It’s to ridiculous to even comment on. Anyhow again just my 2 cents.
If the sl of 20 and have a proof of it then (I think) the trader should not be liable on the rest of the negative lost. However, it is all up t o the broker if they will honor that. Unfortunately, it’s a wait and see of what the brokers decisions will be. It might comes to a point where a need to seek legal action if there is no other way. Hopefully not…
Making great posts as always. I have been scarce around here for a while mainly to protect my rep as I now engage with an institution. So only light comments from me. Quite right GP00 you have to limit your exposure to brokers, holding 100k in a broker account is never clever.
That’s the only lesson to learn. Markets move, every retail trader trading EURCHF was running from risk and thought trading should always be as easy as watching paint dry and scalping a few pips. That was joke… but seriously nothing to learn.
Hello traders! Technically speaking, anyone looking for a safe bet to the upside could not have gone wrong with EUR/CHF for 2015, thinking how the protected floor could mean that one could buy at 1.20 and trade the long road up… But, fundamentally, the QE from the ECB became too much of a weight for the small SNB to try stemming… So this is an example where the general technical picture was at odds with the fundamentals at play…
John Kicklighter of FXCM had this as one of his top trades for 2015, but in Friday’s video he did admit how he got ‘whacked’ here, losing 6% of his account… So it goes to show how even professional traders can and will get it wrong sometimes…
I wish the real world worked like this but unfortunately that is not the case.
A stop loss order gets changed to a market buy or sell order when the level is hit and if you have a huge gap at the time, which was the case during the time of the SNB move, you will be liable and it has nothing to do with your broker and everything to do with the liquidity in the market which had basically disappeared at the time.
This is the same way trading any other news event works and why there is slippage in trading.
I was speaking in terms of the trading itself and not in terms of broker safety.
This comes down to the fact that if you have any substantial amount of money in the markets you should have made sure how financially robust your broker is.
Personally I am with IB who has abt 5 billion in net assets and even though they lost 120m in the SNB move it was insignificant to their overall health.
I really do not know how people were not objective enough to see the flaws in the EURCHF floor, not least of which was that the floor was not instituted by Jordan but by his predecessor. So as much as Jordan would try to uphold the floor for the sake of consistency between regimes, it was always glaring that when push comes to shove, he’d abandon it. It really is amazing that people had stops at 1.1990 and thought there would be no slippage.
For me, I’d say the lessons to be learned are:
Learn how the market works. (Which I learned from a few of the posts here on BP)
I was expecting a parity retest in USDCHF at some point in the near future, so I was tempted to put in a buy limit in the vicinity of 1.0000 but I decided not to, but to trade whatever price I saw that was around 1.0000. If I had set a buy order, I may have been caught up in this frenzy even though price gapped right through parity.
So in summary, the longest time most of us go without checking the prices is probably 12 hours. Using pending orders would lose you more money than it would make in the LT
