This take profit method you must use when you trade forex

The FAT FINGER TP target

In fact it is so compelling you must use it when you trade stock indices as well.

Take note I use the word compelling – not the best, not the most powerful but because the consequences of not setting such a TP is just horrific. There is not even a technique for it as you simply have to make an educated guess – powered by a little bit of luck and many parts wishful thinking. You do not encounter situations like this often but I can count at least 4 last year and maybe 5 including this year.

You see, high volatility events like last year’s ‘SNB-EURCHF’ fiasco, US ‘Black Monday’ on 24 August and then China’s remorseless stock selling on 04 January this year are becoming more common. They look unrelated, happening in different parts of the world. In reality, our financial markets are highly linked, highly correlated and the fact that very crashy events like this are becoming more common is itself a trend. This trend will likely continue, become worse.

In other words, the financial system is becoming unstable as we saw from the high volatility events last year and it is highly likely to see fat finger like spikes in trading intraday, even possibly in the realm of 5%, 10% movements.

USDchf-freezes-gaps-after-snb

1-minute chart showing USDCHF spike, gap

 

What do I need to do?

#1 No matter what you used to do, you must have a protective stop loss. In an extreme situation like SNB’s shocker 15 January last year, it is even possible that a broker can go broke, that a protective SL will be meaningless to you. But it is the job of a broker to take care of it’s own solvency and it is your own job to take care that you do not enter negative equity out of negligence.

#2 No matter what you  used to do, you must have a target price for profit taking. If you are a risk taker, the most compelling trade is to set the ‘FAT FINGER’ TP – one that might be 10% – 20% away. It must be a level that is achievable in one day (albeit only during a market crash) and yet attractive enough to be considered a windfall. The idea is simple: when a fat finger event comes, it could happen in a flash where you are likely to be frozen in fear/excitement. That fleeting moment could destroy your entire account or it could give you a year’s profit. A FAT FINGER TP makes sure you grab that windfall profit instead of letting it slip away because you did nothing. If you did not have discipline to set TPs at all, that windfall will come and go and you can only tear out your hair in disbelief.

hypothetical

Chart from ‘Black Monday’ 24 August 2015; hypothetical fat finger setup and trade in orange

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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  1. By Tan Teng Chew

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