BE CAREFUL “WHAT” YOU TRADE
When the Swiss National Bank pegged its currency to the Euro
a few years ago, I stopped trading that pair, because my trading
system relies on a natural currency market and volatility – and the EURCHF pair
was neither natural nor volatile.
However, some traders decided to ‘work the system’ and since
they knew that the currency was “safely” pegged at 1.20 and did have small
fluctuations higher than that, they bought in going long near the 1.20 mark
(sometimes at very large risk) and cashed out at some point just slightly
above.
This pattern repeated for three years until this day the SNB
decided to unpeg the currency with no warning, causing an immediate plummet in
the EURCHF market. Many traders were
caught long, and even those using stop losses or trying to manually close their
trade could not get out because no one was buying. Beware the manipulated market.
DON’T TRADE THE NEWS
This is also a good example why you should not trade based
on financial news such as “expected quantitative easing,” or any of the other
never-ending announcements. Many traders
were caught in the wrong end of that trade because they listened to the Swiss
government's own statements that the Euro peg strategy was still a cornerstone
of their economic policy (stated only a few days prior to this event). Traders who
took that to heart, found
themselves on the wrong side of that trade.
DON’T TRADE CORRELATED PAIRS
This tragedy also offers us traders a couple more
lessons: one is that, this is why it is
dangerous to trade correlated pairs. The
Franc affected the Euro most severely, but all CHF pairs were strongly impacted and
traders having more than one CHF trade open simultaneously obviously suffered
even greater losses.
USE SMALLER ACCOUNTS
The second thing that comes to mind for me is that it’s not
a bad Idea to have smaller accounts, even if you have multiple. That way, you are minimizing the risk to your
whole capital pool. So, if some
catastrophic market event were to happen to “that” trade, you only risk losing
that ONE account if your stop loss is not filled such as in the SNB debacle. For instance, if you had three smaller
accounts, maybe you risk 1% per account, but never on the same trade in more than
one account.
USE A RESPONSIBLE BROKER
As for the brokers, the reason they got in trouble is because
many of them only require traders to risk a minimum of 2% of the value of their
bets, which most brokers leveraged heavily.
They were then stuck with the large leverage-induced negative balances
of their client’s accounts after the crash.
It’s early, but it appears that the brokers who weathered this storm
best protected themselves by not carrying as much of a risk burden from their
clients.
