Friday, February 1, 2008

MSFT bids to buy YHOO, that's why I'm happy that I don't trade stocks

Let's say that you have nice big short position, maybe leveraged, that you are trailing. After news like today your stock gap up premarket 60%. How big are your loses?

In forex any such big news event can probably move market 100 pips or 200 pips in a second. But if you have some kind of stop, whatever the slippage you will be out of your position.


lonelytrader said...

Actually, I have had some nasty gaps traing FX spot...even on pairs like EURUSD. In my first year of trading, I had a position in which I was above water and like a dummy, I held through an NFP announcement -- this was back in 2001 when brokers would honor their stops and limits and when the price action after the announcement was really wild (much more than today). Back then a straddle was possible. Sometimes it would take twenty minutes for the orders to settle. Now that the brokers don't do that anymore, I don't even bother. They throw up a disclaimer and basically you are on your own. But on this occasion, the market gapped like a backstreet ho. You don't see these gaps on many in-house FX charting packages -- but they are there. The market gapped through my stoploss, taking my position from above water to very much below water in a matter of seconds.

When I tried to exit at market, the electronic platform wouldn't take my order. So I had to call in. Meanwhile, price was running away from me -- and not in the right direction. By the time I got a broker to close my position, I had lost more than 6R.


Bottom line is that even in the FX spot markets there is a chance that price will gap through your stop or limit orders. These days volatility may be down a bit from four or five years ago, but I would say the broker is much less willing to be sympathetic. And I don't even bother holding a position through a major announcement unless I have really thought through the risks and am in a good position.

Still, you can usually get out before a catastrophe occurs in FX spot. I would say it's a much, much better alternative to a limit up or down situation on the ES. (I've never experienced one.)

FX said...

Calling in?! I can just guess your frustration at that point

BOJ interventions were the wild ones also. Whatever gap I feel little bit more
secure in FX than stock markets. Maybe it's just false sense of security.

lonelytrader said...

Yeah I remember those days. I participated in a chat group where this guy, an IT consultant from somewhere in Southern California, was bragging for three or four days straight on how much money he was making in the USDJPY. If you remember, there was this level below which the BoJ had forbidden the pair to drop -- and it seemed BoJ would rather go insolvent then see the Yen appreciate further.

Anyway, this guy was piling on longs with a tight stop -- risking half of his account with max leverage. It was ugly and he was basically printing his own money, according to him. I think he had made $60K in three days.

I was so jealous of him that I actually began to wish that he would lose. All I could do was sit on the sidelines and trade the other pairs. And then I said it -- watch out man, or you'll get hammered. I said it not out of some prescient insight or our of experience, but to shake him psychologically because I was jealous. I was not happy with myself, but there it is. I'm a pig.

And then it happened. The BoJ's wall turned out to be a mere line drawn in loose sand -- importers crushed USD longs, sending JPY through stops like a hot knife through butter. And I secretly wondered whether this guy got caught.

I never learned exactly what happened, but I think I can guess. He kind of disappeared for awhile and then only occasionally stopped by to chat -- nobody wanted to ask him about his trading and he didn't seem eager to talk about it. But he sounded positive.

I don't know. It's entirely possible he got hammered. It crossed my mind and I felt more than a little bit queezy about myself for wishing that on him. I can only imagine how it would feel.

Bottom line -- it isn't just the BoJ that can kick you in the balls. I think in Japan there are basically three cartels that run JPY speculation -- the exporters, the importers, and the BoJ. And it is a constant battle. I think it is closer to a racket than most realize. My own experience with Japanese corporations is that they will play as dirty as any Nigerian smuggler would.

But I love the JPY. I think the three best currencies to trade are the USDJPY, EURJPY, and that order.

FX said...

You are pretty knowledgeable man, you should maybe write something of your background and history/trading history on your blog. Or maybe you did and I didn't catch it

lonelytrader said...

My story reads like this:

"Spinning his wheels since 2001."