Swiss Bank Rocks the Forex Market: 5 Steps How to Protect Yourself

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.

16- 1- 2015 drama

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.

16- 1- 2015 DRAMA 2

PROTECTION

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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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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  • Yehezikiel Mel Melliun

    What is your recommended leverage ratio Sir?

  • Bim

    That’s mean in forex trading we can’t avoid ‘the risk of stop loss (risk management which always stressing when learning the forex market)’ in my case which had already set +/- 30 pips became 1,800 pips up?… if so, wow it’s really too bad !

  • Chris

    Sorry Stephen, but lets get something cleared. You were focusing on Admiral Markets in your previous post. I have nothing against your comment against the whole broker industry in general. My comment was that Admiral was not significantly affected by the SNB storm, that is all. If your comment was right away mentioning the entire industry I would say nothing. Hope you understand. I wish you the best too.

  • Stephan

    Hmmm, sorry Cris but obviously you dont know a lot about this. What you wrote is theory which every retail FOREX broker sell to customers.
    I am 15 years in FOREX market and went twice through retailer forex brokerage bankruptcy. And then lawyers and backoffice staff explained me in details how this works. .
    The point is…..95% retailer in forex market lose money and everybody knows that. AND that is why you have so many retailer FOREX brokers, and a lot of them is your counter party.
    Your broker is your biggest enemy, and when you start to make a lot of money (five times, ten times biger as your account) call me and we Will go to beer and you Will explain me your problems with your broker (I dont care who is it)
    until then, I wish you the best

  • Chris

    Hi Stephan, your information is incorrect. Admiral Markets is an ECN broker for most clients (those with a capital of more than $1k). For those trading with lower than $1k, then the orders are too small for ECN so they offer NDD (no dealing desk) as a solution.

  • Stephan

    Of course not, because Admiral Market is clasical broker who is your counter party,
    if you lose they win, and I dont know person who was selling EURCHF, everybody bought them. They stoped EURCHF on 0,8460. I know some clients, who broke through AM.
    It Would be very interisting if the EURCHF jump on 1,3 or 1,5 (15.1.2015)
    I think that AM have been closed office.

  • Bim, Two quick things:

    1. Have more than one broker account. Keep a back up.

    2. Use low leverage if you only have small trades open compared to your balance a massive hit will not decimate the account.

  • Bim

    Casey, can you give me some alternative how to manage risk if the protective losses may not working in trading ? for instance it’s happen to me last Thursday I had already set the stop loss +/- 30 pips in fact I got loss 1800 up, in this case how to say that I still can protect myself? thank you for your advise

  • Richard, Forex still remains a valid market to produce income. There are risks in this market as well as other markets. The key is to protect yourself. I recommend trading with low leverage and not keeping your entire balance in your forex account.

  • Brokers don’t guarantee stops. And in this event stops were not honored in many cases.

  • Bob

    Hello -can you ask support to respond?

  • Bim

    Now I supposed brokers which can guarantee ‘protective stop loss’ always working in any condition that’s the good one

  • Bim

    As a trader, we have a tool ‘stop loss’ to protect uncertainty… then as long as broker can guarantee protective stop losses is being respected in any condition then forex is still a viable market to produce income I supposed

  • Richard Semock

    If swissy can do this other currencies can as well and probably will. In view of this condition of uncertainty in the forex, is it still a viable market to produce income.

  • Chris

    Point 6: spread your risk by having multiple accounts at mulitple brokers.

  • Chris

    Hi Theo, I myself trade with Admiral Markets. They have handled the SNB turbelance well. Others I know trade with Talinex and ATC, and I didnt hear anything bad happen with them. Thanks

  • Theo Paine

    What brokers do you recommend who handled the SNB crises better than most? Currently I’m with FXCM.