Flash Crashes

SunTrader · Sep 17, 2020

AbbotAle said:
Also look at the Swiss debacle around 5 years ago. Look at the chart, it had been weak for months so NO trader should have been long.

The Swiss chart is EXACTLY what you'd expect before a flash crash happened. True, it might not have, the peg might have been defended but that still doesn't mean any trader should have been long.

Depends on the pair. Look at USDCHF.

bone · Sep 17, 2020

If there’s another flash crash in a major market - many heads will roll. That is something that a regulated exchange wants to avoid at all costs.

There’s a hell of a lot more to worry about in this difficult endeavor.

I wish everyone good fortune.

Blitzjoker · Sep 17, 2020

Snuskpelle said:
You can't trust stops. And at some point you're going to see a major stop blown. Effects depending on parameters can range from something you just shrug off (because you're confident in your strategy), to depression, to career ending.

Only remedies:

Position size so you can lose 100% long side in a stock or 100 to 10000% short side (depending on type of stock), or about 20% instantly in an index. (Probably requires multiple uncorrelated positions for meaningful profit.)

Hedge with options. Probably best option when you're trading single positions.

Pay for guaranteed stops (if your platform supports that in a good way).

FWIW I was short when Fed decided to announce their biggest interventions in the COVID panic earlier this year... took a $6k loss on $80k account instantly despite nominal risk for trade being at 1% of account. Yeah, probably shouldn't have been short at that point, but that's besides the point.

Thanks very much for sharing this, and bad luck for the 6k loss - that is just the sort of situation I was trying to prepare for. I shall look at all of those options. I suspect that many unseasoned traders would be unaware that even with careful money management and stops, it is still possible to take a big loss when the market moves quickly.

Blitzjoker · Sep 17, 2020

AbbotAle said:
Snukes, the trouble with hedging with options or paying for guaranteed stops (only available for spread bets) is the cost.

If options/guaranteed stops are viewed as insurance then insurance doesn't pay out that much because the majority of the time it's not needed (think house insurance). Therefore it's better to self-insure, ie take a few ticks from every profitable trade and use that fund to pay out to yourself if/when you get massive slippage.

PS. There's a reason why guaranteed stops were introduced and it's not to help the clients sleep well at night. Who's selling them and how much do you think they take in versus payout? Plus, they're an excellent marketing gimmick, scare the clients with the tale of horrendous potential losses and just happen to have a product on hand to protect them (for a fee of course)! Fear sells...

Yes insurance can be expensive. I do spread bet on the Dow so could use guaranteed stops, but as you say, it is probably expensive and self-insurance may be a better option.

AbbotAle · Sep 17, 2020

SunTrader said:
Depends on the pair. Look at USDCHF.

Yes, but there wasn't a peg against the USD.

EUR-CHF was where they were gambling with their lives trying to make 5-20 ticks, and they paid the price.

Blitzjoker · Sep 17, 2020

bone said:
If there’s another flash crash in a major market - many heads will roll. That is something that a regulated exchange wants to avoid at all costs.

There’s a hell of a lot more to worry about in this difficult endeavor.

I wish everyone good fortune.

Thanks; yes I get this. Maybe my concern should be more with a very sudden market move (say a few thousand points on the Dow) rather than a flash crash.

CALLumbus · Sep 17, 2020

You cannot protect against everything in life. What you can do:

- Use a good and reliable broker
- have a backup broker
- have backup power supply/ UPS
- have backup internet
- know what you are doing
- do not overleverage

Besides that, there is not too much you can do, so dont worry too much.

Scataphagos · Sep 17, 2020

CALLumbus said:
You cannot protect against everything in life. What you can do:

- Use a good and reliable broker
- have a backup broker
- have backup power supply/ UPS
- have backup internet
- know what you are doing
- do not overleverage

Besides that, there is not too much you can do, so dont worry too much.

Let me add...

Trade liquid issues with reasonably tight stops. Odds are slim that there will be an event where the "bottom drops out in an instant". More like weakness, more weakness... and then at some point, plunge. Your "tight enough" stop should take you out before the drop gets critical.

Blitzjoker · Sep 17, 2020

CALLumbus said:
You cannot protect against everything in life. What you can do:

- Use a good and reliable broker
- have a backup broker
- have backup power supply/ UPS
- have backup internet
- know what you are doing
- do not overleverage

Besides that, there is not too much you can do, so dont worry too much.

Thanks for this. I do have all of those in place (apart from knowing what I am doing, which is very much a work in progress), so you are probably right. In real life I only insure against disaster, not against manageable loss, so that would probably be the best approach here.

SunTrader · Sep 17, 2020

AbbotAle said:
Yes, but there wasn't a peg against the USD.

EUR-CHF was where they were gambling with their lives trying to make 5-20 ticks, and they paid the price.

Yes but understand the overwhelming amount of money in forex is multinational corporations and major money center banks plus the occasional central bank or two or five hedging their currency risk. Not lol retailers.

Once peg was lifted these corporations and banks had to adjust.