The recent stock market correction should serve as a wakeup call for complacent Forex Traders
Trading successfully can often be described as a complete life skill and there are sections in the poem of Rudyard Kipling which relate to certain aspects of our trading;
“If you can dream and not make dreams your master; if you can think and not make thoughts your aim; if you can meet with triumph and disaster and treat those two impostors just the same.”
However, there’s also a part of the poem that is the complete antithesis of how we’d recommend trading, in terms of risk management, being prepared to blow up your account isn’t a strategy, its terminal to your prospects:
“If you can make one heap of all your winnings and risk it on one turn of pitch-and-toss, and lose, and start again at your beginnings and never breathe a word about your loss;”
During the turmoil experienced last week, as USA equity markets slumped into correction (10%) territory, forex traders were spared the carnage, the currency pair movements were no greater than we’d experience most days like when a high impact news event misses or beats target, or if there’s a major breaking political issue unfolding. Although our forex currency pairs range more than they trend, if we’re day trading or scalping, then we can still make healthy profits from currency pairs that range in a daily trend of perhaps 0.5%. A 1% movement is unusual, but a movement that were used to, but it’s difficult to place a precise measurement, regarding how often we experience, a 1%+ move on for example EUR/USD, maybe once a week, or once a fortnight.
During the equity market selloff we didn’t experience the usual flight to what’s termed “safe havens”. Gold, silver, yen and Swiss franc, our forex markets were comparatively calm. The movements we witnessed were no different to that we’d experience most days. Perhaps as traders we’re primed and ready for the currency pairs we trade to whipsaw and suddenly reverse direction, we see it so many times across the board. Our markets are highly sensitive to the continuous stream of fundamental economic calendar events and breaking political news, whereas for many years USA equity markets appeared to be impervious.
However, the equity market recent sell off should serve as a wakeup call and prevent us from becoming complacent, whilst we know we can profit from bullish and bearish markets, there have been times when currencies can also collapse, or spike in value. The most recent reference is the Swiss National bank, removing the Swiss franc from its loose peg versus the euro, causing a fall in EUR/CHF and USD/CHF of 15%+. A collapse so sudden that certain brokers were put out of business and many traders lost considerable sums, as they’d become complacent and forgotten the basics.
Some traders, having realized that forex pairs rarely move up or down by 1-2% in a day, neglected to place hard stops on their USD/CHF bets, they suffered catastrophic damage to their account balance. Some were fortunate to be stopped out as their available margin didn’t cover the loss. Others had to suffer their account balance being set back to zero, whilst being faced with margin calls/demands from their brokers. For a short period of time the situation was a mess, particularly for those who neglected to maintain the discipline they’d embedded in their business plan.
It’s important that we reflect on the recent correction and not deviate from the methods and strategies that have served us well, particularly in relation to risk and money management. Whilst our forex markets are in some ways predictable, there’s always the outlier events that can impact on the most highly tested and robust strategy.
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