The Swiss National Bank (SNB) statement on Thursday 15th of January sent a massive shock through the financial system. The SNB’s surprise decision to give up its currency peg of 1.20 with the Euro prompted dramatic price movements of epic proportion in the Forex market.
THE MARKET COLAPSES
The Swiss Franc (CHF) rose with an unprecedented speed in the first minutes after the decision was communicated. This seismic shift did not only occur against the Euro (which was pegged at 1.20), but also against all other major currency pairs.
Markets, price, traders, brokers, and banks were sailing in unchartered territory when the statement was released. The Swiss Franc was uncontrollable and the EURCHF, USDCHF and GBPCHF (plus all others) were in a classical free fall.
Here is a taste of some of the drama that occurred “on the ground”:
- With the ensuing drop, liquidity was certainly scarce and in some cases seemed to vanish into thin air. Many brokers and platforms even stopped offering quotes.
- Anger arose with traders that were unable to close open orders or did not see their protective stop losses being respected.
- Margin calls were certainly not exceptions amidst the turmoil.
- At times when quotes were available spreads had risen to unprecedented levels. Some traders reported seeing spreads from 500 up 1,000 pips.
- Price literally went off the charts and price “froze” for a while before finally “reappearing” again much, much lower.
Traders and even some brokers were left empty handed during the chaos and it might still take a while before daily business settles back to normal. Many claims will be made, amendments might be required, and a lot of communication will be needed before the events of Thursday are anywhere near resolved. And even then, many traders and perhaps even brokers and some banks could feel very annoyed about the events that took place on Thursday.
The “Black Swan” event is of course a very rare occurrence, and this is precisely the reason why it is difficult for traders to plan against such an event risk. But perhaps some best practices can be found. Here are a few ideas that might be worth considering when reviewing your trading plan:
- Choose a broker that was able to handle the Swiss Franc chaos. A broker that has shown capable responses and liquidity during the dramatic price movements, will have better chances of resolving the next Black Swan event.
- Keep your level of funds to the minimum needed for trading. Traders must remove any access funds on their trading account as soon as possible to reduce the losses in the event of a margin call. Read more here about account management.
- Be very wary of trade plans based on market intervention and central banks. Central banks have massive impact and do not inform you of their intentions. Taking trades based on the communicated and interpreted directions of a central bank leaves traders vulnerable to unknown uncertainty (unknown unknowns as Donald Rumsfeld would call it), which is basically an unquantifiable risk level.
- Be cautious on speculating during times with extreme volatility. It seems appealing to jump in a trade when the market is moving 200 pips a second. But when price is really chaotic the risk of spread, transaction costs, lack of liquidity, and technical problems most of the time outweigh the advantages.
- Be cautious of trading the Swiss Franc. SNB has already intervened twice this decade, so a third time might not be all that strange. Traders are warned.
Traders can never fully remove this event risk of course. But the above steps could improve your odds.
Where were you when the statement was made?
Please share your story with us in the comments section.
Thanks for sharing and Happy Hunting!
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