A Warning to All Traders: Your Stop May Not Be a Stop
Anyone who has survived the forex trading wars and is still trading knows how important stops are to preserve capital and staying in the game.
As I noted in Use stops and Live to Trade Another Day
Stops are a necessary evil for any trader who wants to stay in the game. Some traders may try to avoid using stops but all it takes is one surprise headline and the game is over..
Stops are like an insurance policy to protect against a trade not working out. A stop is also protection against a surprise or an unexpected event
When a stop is not a stop
However, there are times when a stop is not a stop but an invitation to lose more than planned or even to see an account wiped out.
In the history of trading there are times when a currency, for example, gaps in a straight line and stops are executed far away from where they are placed. While not the norm, there are enough instances to have left the floor littered with blown accounts.
The one that comes to mind occurred on January 15, 2015 when the Swiss National Bank pulled its bid supporting EURCHF at 1.20 and what followed was a true black hole. No stop was safe and in fact many traders found themselves with negative margins when their positions were closed out, some as much as 20+% away from their stop level.. The range for that day was 1.2020-.8643 with most of the move occurring in minutes although there is a debate as to where the actual low was depending on the broker.
Source Quantitative Finance
While this was an extreme case to say the least it underscores when a stop is not a stop. Whether a stop is executed 50 pips, 100 pips, 200 pips or more from where it is placed, the results can be disastrous depending on the amount of leverage used
Time for traders to beware
This brings us to today’s market where attention is clearly focused on the results of the US election. As liquidity thins with trading driven by election headlines, even if you call the vote correctly you could easily get stopped out on a false start as news algos will rule the market. The issue is not getting stopped out but at what price.
A Warning to All Traders: Your Stop May Not Be a Stop
Now, to be clear, I am not suggesting to trade without a stop loss. Just be aware that the next few days will not be business as usual. There is a reason why implied options volatility has soared in currencies like the EURO and Mexican Peso to levels not seen since the 2016 U.S. presidential election.
So as a warning to all traders, especially those relatively new to the game, your stop may not be a stop as you are used to but don’t trade without one. Either reduce your leverage and widen your stop or sit back, enjoy the fireworks and look to trade once the dust settles.
A Warning to All Traders: Your Stop May Not Be a Stop
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