WOW ! i see it this way !So let's do some calculation

Trading Discussion Risk Management Practices
1

Hi everybody , i’v made some calculation to see whether or not Forex trading is a profitable job for me or not , and so far the answer is NO for me .

i’d like to share this to you hoping that you shed some light into it and i thank you in advance.

imagine that you have been trading for some years ,you have been successful so far and you have gained some equity and now you open a 100,000 size of EUR/CHF Long position in 1.3000 with leverage of 10:1 .

therefor your real equity would be 10,000 which by leverage of 10:1 you had the possibility to open that position .

you set a stop loss for 50 pips and TP for 100 pips , but suddenly since this market is extremely volatile , and because of an important financial news ,the market starts falling down rapidly so that your stop loss (SL) can not get hit because the lack of liquidity in that special moment , and now ,the price has fallen till 1.1000 , which means you have lost 2000 pips !

now let’s do some calculation :
[B]
1.3000 -1.1000 = .2000 pips

100,000 * .2000 = 20,000 [/B]

you had 10,000 of Equity and now this trade cause 20,000 of loss , so before you could blink , you will see the margin call alert and all your efforts through these years will gone …( i don’t know what is the right term for this situation , you can find one !:15:)

Question 1 : is it possible that market falls down by 2000 pips ?
my answer : well actually YES , look at your chart , click on EUR/CHF, go to this Date 15 Jan 2015 , you will see the big red candle for yourself .

Question 2 : is it possible that the stop loss wont get hit in these kind of situations ?
my answer : Yes , just because you set a stop loss, it does not mean that it get hit ! it depends on the market liquidity , and in case the lack of liquidity there would be no one who is willing to buy your selling order and well …you know … !

Question 3 : what is the solution for that ?
my answer : I Don’t Know !

this is the way i see this matter , so what do you see ?:slight_smile:


3

Well, that’s exactly where all of us started off.

I’m wondering how much trading-related education, training and practice you’ve had? I know it’s not an altogether realistic analogy (in a number of ways), but one obviously wouldn’t expect to be able to perform surgery on patients successfully without attending medical school and having a lot of training and practice first? There are some similarities, I think?

Yes, but the specific example you refer to was an unusually extreme, “once-in-a-decade” phenomenon (if even that), which affected (albeit very dramatically!) only a very small proportion of us.

Again, you’re right: the market can “trade through it”.

You can avoid the financial risk and effects of that, if you wish to, by trading with “guaranteeed stop-losses”. If you do that, your broker undertakes and guarantees to close [U]your[/U] position at [U]your[/U] stop-loss level whether [B]they[/B] were able to close their own positions at that level or not.

In other words, it transfers the financial “fast market” risk from you to them.

It’s just like buying insurance and paying a small premium to protect yourself financially from the adverse effects of a “black swan”.

4

hi lexys , thanks for the reply , well actually this is the first time i hear a broker can guarantee a stop loss ! but i’m going to ask and do some research about it .:slight_smile:

7

No, that’s [U]incorrect[/U], David: as explained just above, if you pay the extra on the spread for guaranteed stop-losses, then your loss is limited to the level of your selected stop-loss [I]whether the market can close trades at that level or not[/I]. If you trade that way, it’s [I]not[/I] about where your broker can close your trades: it’s about how they’ve agreed to settle your position [I]regardless of that[/I].

8

i don’t undertande