EUR/USD - too risky to trade?

jodistrict · Jun 19, 2015

I have been trading EUR/USD for a few weeks on FXCM. I have noticed that there can be high volatility spikes on the one minute bar at unpredictable times. When this happens, your stop slips and you get out with a large loss. Furthermore, these high volatility spikes don’t appear on the stocks or futures at those same times.

I have an example today below. There was a sudden 26.6 pip up spike followed by a 62.5 pip down spike. On the down spike, slippage on that stop on a 100,000 contract could result in a $625 loss.

How do other traders deal with this?

justrading · Jun 19, 2015

I trade longer term with wider stops. I nevertheless have bought downside protection with FXE puts. After that SNB fiasco, I don't want to join the ranks of those who had their accounts wiped out.

jonny1lot · Jun 19, 2015

justrading said:
I trade longer term with wider stops. I nevertheless have bought downside protection with FXE puts. After that SNB fiasco, I don't want to join the ranks of those who had their accounts wiped out.

How far OTM are you going to put on those puts? Straight puts or cashless collars?

justrading · Jun 19, 2015

I bought OTM butterflies with the body out 5%. If things heat up the puts 10% out currently cost $2 each. I doubt it'll go 10% but if the 5% happens in 1 day, the IV spike on those puts should see a payoff. Alternatively just do a vertical spread. I really should have done a cost-benefit comparison but I've been busy so just put on the flies.

Also look at the CME 6E FOP. I haven't touched FX futures in ages so the only benefit I can tell you off hand is with these you have longer trading hours, but do check liquidity outside RTH.

Balliwygon · Jun 19, 2015

Kind of risky but yet it is thrilling

i960 · Jun 19, 2015

jodistrict said:
When this happens, your stop slips and you get out with a large loss. Furthermore, these high volatility spikes don’t appear on the stocks or futures at those same times.

This is not true. That move was present in 6E futures. Additionally this does not look like a move a stop would have been heavily slipped on (as opposed to something like an NFP or FOMC event where they most definitely would be).

justrading · Jun 19, 2015

i960 said:
This is not true. That move was present in 6E futures. Additionally this does not look like a move a stop would have been heavily slipped on (as opposed to something like an NFP or FOMC event where they most definitely would be).

I got stopped out of one of my crosses post-FOMC and only had 2 pips slippage (Oanda). My only real concern is an event that causes liquidity to dry up, then the stop becomes meaningless, or so we'll be told.

jodistrict · Jun 19, 2015

Yes, I know the move occurred on the 6E. I meant that these moves didn't occur on the stocks and other futures, such as ym, nq,es, at that time. I have only been caught once by ones of these moves. The slippage was 20 pips. These are extremely rapid flash moves. I am surprised nobody has been caught in these.

Visaria · Jun 20, 2015

justrading said:
I bought OTM butterflies with the body out 5%. If things heat up the puts 10% out currently cost $2 each. I doubt it'll go 10% but if the 5% happens in 1 day, the IV spike on those puts should see a payoff. Alternatively just do a vertical spread. I really should have done a cost-benefit comparison but I've been busy so just put on the flies.

Also look at the CME 6E FOP. I haven't touched FX futures in ages so the only benefit I can tell you off hand is with these you have longer trading hours, but do check liquidity outside RTH.

Consider this: you have a position in something forex or whatever. Because you are concerned by the possibility of a black swan type move you buy OTM options. You experience a spike and you are stopped out with huge slippage. You try and cash in your options which are now in the money. Before you can do so, unfortunately, the spike reverses back just as fast, meaning that the options you bought are OTM again and near worthless*.

Thoughts?

* ok, the increase in vol, would means these would have increased in value, but not enough to offset the losses from the underlying instrument.

i960 · Jun 20, 2015

On top of that, there's liquidity in the option market itself to concern oneself with even if it doesn't whipsaw back.