Sometimes it’s easy to get lulled into a false sense of security when trading. The markets are moving about but not dramatically. You make some money and feel like a king. But if you don’t respect that at any given moment the market could do something crazy, it’ll catch up with you sooner or later.
IT’S A CRAZY OL’ DAX
Now the Dax is certainly not for the faint-hearted at the best of times. It has a €12.5 tick value and often has a 200 tick range for the Eurex session. It’s not unheard of to be 2 or 3 times that either. It’s thin and often aggressive in the way it moves. So you probably want to maintain a healthy respect for it at the best of times. But to run a position over a big economic release or the ECB press conference is pretty risky to say the least. If you can’t define your risk you shouldn’t be in the trade.
AN UNDEFINABLE RISK
An undefinable risk is where you do not know how much you will lose if you are ‘wrong’. If you have your stop in place (which really you should) in practical terms you will usually get taken out to within a few prices of your stop order. Remember though, that a stop order becomes a market order when a price at or beyond the order is traded. So theoretically there are two scenarios where your risk is as good as limitless (or if you’re short, limitless). One is where there are no trades going on as the market moves through your stop. In this case, until you actually get a trade beyond your stop, it won’t activate. Sure, you could manually exit the trade and cancel the stop order, but then markets that are moving without trading tend to be doing so very quickly anyway. The other scenario is where a large order is placed at market before your stop price gets hit. In this case, the market order will take precedence over your trade and may take out a few prices before your market order gets filled.
IT NEVER RAINS BUT IT POURS
Well in fairness it does rain. But the real danger is if you have a market that’s normally thin and thinner still because of news, traders are pulling orders and a large market order gets executed. This is undefinable risk. And this is what may have happened over the ECB announcement this month. But to top it all off, markets can be halted in extreme volatility. Prices moved so quickly because of a huge market order (possibly a “fat finger” error – i.e. an order which was much larger than intended) that trading was temporarily suspended for the Dax. Given the fact that it had just printed 190 points lower almost immediately after the ECB release, if you’d had a position you’d have likely been pretty worried to say the least!!
In actual fact if you had been reckless enough to run the position over the ECB without a stop order, you’d have got away with it as when it resumed trading a few minutes later, prices were close to what they were immediately prior to the release. The real danger here was for the traders who had stop orders in place and got triggered in after the fat finger order went through. This day in all likelihood, ended very badly for those unfortunate few as the trades were apparently ratified.
A LESSON LEARNED?
Thankfully such big events don’t happen that frequently. A hit like that on the wrong size is what account blow ups are made of. But it doesn’t have to be such a large event to pack a punch. So the lesson that needs to be taken in whether or not you got in trouble here is that anything really can happen! Although anything can happen at any point during a trading day, there are times and places where big moves are more likely to propagate crazy moves. Big news and especially big news following big moves, can cause this. Remember, trading is about the many and not just the few trades that you take during your career.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.