Forex traders it’s not your fault the market is constipated!
Near the worst time to trade forex in last 6 years
It’s been a frustrating year so far for forex trading. Besides some huuuge episodes like January’s global stock crash triggered by China and the period before and after Brexit where we saw big movement in currency pairs, most of the time markets can be only described as moribund – ahem technically correct term is consolidating. What traders thrive on is movement, plenty of directional movement (not spikes). Tight ranging markets that u-turn, that does not follow through do not provide the best trading condition.
Tight range, no follow through, visious U-turns
Consider that back in September, the highest week high-low of EURUSD was just over 180pips. From my personal experience, EURUSD should do 250 pips or more in a good week. This year what we have is consolidation followed by consolidation rather than good trending movement.
Take a look at the weekly chart of EURUSD below. One of the best times to trade is when the market trends for weeks on ends like during most of 2014. This year what we have is many weeks that are just very short inside/engulfing candles. This means if you look at the week chart, there is absolutely little to no movement during the week. Day to day or intraday price action could be either be directionless in a tight range or brisk movement but round tripping a few times.
And then there is the other kind of bad trading week – when you can see price trending for 3-4 weeks and then suddenly reverses, undoing all previous movement in one week possibly even one day. Think about it. Stand in the shoes of a guy who is mostly scraping by, sees consolidation as an opportunity to build up a nice position to ride for a couple of weeks and then Kaboom! all wiped out in a single day what took 2-3 weeks to put together.
EURUSD second lowest weekly volatility since 2010
This very useful tool provided by Mataf.net gives us a visual of EURUSD volatility. Based on 1 week or 5-day Average True Range, EURUSD is visibly trading it’s second lowest volatility since 2010. Lowest appears to be late July, early-August 2014. EURUSD is not alone, other currency pairs like AUDUSD and AUDJPY are also going through a period of very low volatility.
GBPUSD once-in-a-few-years shit
On the other hand, this GBP witch is just plain vicious. If EURUSD tries to kill me with boredom/unlimited number of u-turns, then GBP is just spike away from the next account busting move. I have written about Brexit as well as last week’s GBP flash crash here, here and here.
In addition, I observed and wrote this
Worrying signs such shocks are stacking up in short time
All these are worrying signs of instability. Consider the damage caused 15 January last year by a flash crash of CHF pairs due to Swiss National Bank’s decision to de-peg the EURCHF. The crash caused several branded forex brokers to become insolvent. In addition consider these market shaking events:
1. March 15 2015 FOMC decision not to hike rates despite wide belief caused EURUSD to spike 400 plus pips in 3 hours.
2. August 11 2015 PBOC’s shock decision to devalue the Yuan caused USDCNH to spike 1600 pips in 5 hours.
3. Currencies, stock market flash crash with US stock indices limit down on ‘Black Monday’ 24 August 2015.
4. China stock market indices limit down on January 04 this year leading to worldwide contagion.
5. ‘Unexpected’ Brexit vote throws GBP into chaos, with GBPJPY down 15% in a day.
We can see that during Brexit and ‘flash crash’ that GBP pair price actions are all multiple-sigma outliers in the statistical sense. This is something that no one can predict, that both experienced and new forex traders are equally likely to be hit.
Lousy markets, lousy brokers
An individual outside our community wrote to me
will like your advice. Due to the recent GBP flash crash, my entire FX positions were closed out. My entire equity of USD15k were wiped out and now suffer a negative equity of USD8.7k instead. I was long USD150k GBP at average cost of _ 1.27. They were closed at 1.10628.
_____ went back to their liquidity provider and managed to get a better fill at 1.146, narrowing my negative equity to USD2.86k (ie. total loss is USD17.86k).
Ordinarily this is a straightforward case of forex slippage which is ‘part and parcel’ (happens from time to time) of the trading business.
What is forex slippage
In my unqualified opinion, this is a classic forex slippage. It is unlikely to be a broker mistake since this GBP crash was a widely reported/talked about event and not confined to small segment. It is therefore highly unlikely for retail traders to get any redress. As the crash unfolded, there was no liquidity i.e. no bid from counter-parties (liquidity providers that take the opposite of our trades). Since there was no bid, stop loss orders could not be filled. The next available bid could be 200 pips away resulting in an outsized slippage.
This particular case is shocking because of the huge discrepancy between this person’s heartbreaking encounter and the rest of the market. The lowest GBPUSD quote from my own forex broker Axitrader in Australia was 1.18253. Lowest price from IDC (TradingView) was 1.1950. Lowest price from Oanda (TradingView) was 1.16496. My impression is that most brokers quote at the 1.18 region.
It is unbelievable that the individual who wrote me (was trading with a local SG broker) had to put up with a ‘better fill’ at 1.146.
Is there any kind of redress? I don’t know. What I do understand is since last year’s SNB-CHF fiasco which also led to a slippage problem and which bankrupted several brand name brokers, traders have been informed that negative equities are possible, that individuals have to make good their negative balances. What can an individual do? At least in Singapore, there is someone to turn to – FIDReC or Financial Industry Disputes Resolution Centre Ltd.
The jurisdiction of FIDReC in adjudicating disputes between consumers and financial institutions is as follows:
(1) For claims between insureds and insurance companies: up to S$100,000
(2) For disputes between banks and consumers, capital market disputes and all other disputes (including third party claims and market conduct claims): up to S$50,000
At present, FIDReC’s services are available to all consumers who are individuals or sole-proprietors.
8 measures to protect your trading capital
These are precautions I have taken for myself
- Use forex brokers that operate in countries with strong regulation.
- Use brokers that have many liquidity providers, are forthcoming with information.
- Split trading capital between multiple accounts to diversify risk and to prevent trading activity to be entirely disrupted.
- Check price feeds regularly against other brokers, maintain feedback.
- Always maintain a stop loss.
- Withdraw trading capital regularly.
- Use brokers that offer deposit guarantees (although brokers with this arrangement is quite rare).
How to tide through this bad time
I can only provide some speculation why the market is behaving this way:
- The market is going though a systematic change that started with the Subprime Crisis but not resolved, only papered over with measures like QE. This is why stock price of some banks like Deutsche Bank never recovered.
- Liquidity may be affected as market becomes algo-driven.
- Market could be posturing until US president election is over.
As far as I am concerned no one knows how long 1 and 2 ↑ will continue but the US election has a date we can look forward to Tuesday 08 November. I keep my fingers crossed that the market will finally show it’s direction by breaking out of the current consolidation mode and make a run for it, up down ANYWHERE because sideway is just so tiring. Between now and then however, a good way to manage trading is to do the following:
- Don’t trade.
- Look at other markets.
- Go for quick in quick out, shorten holding duration.
- Stick to tight stop losses, small position sizes.
If you were not doing well till date, I put it this way – it’s the market’s fault. GBP is such an excellent example. Feel bad for awhile but don’t feel bad forever don’t give up. Hang on, play a bit more of defensive play, I think that the market will reach a breakthrough moment soon, there’s a good reason to look forward to November.