Aug

1

EducationI rarely use stops in the ForEx market, but yesterday I decided to use one for this trade, and the result is something right out of the currency trading no-no's in Education of a Speculator.

Broker: The SL got executed correctly at the quote you specified at 1.55185
ME: It was the bottom tick
ME: market spiked right toward my stop and then continued away
Broker: The quote got reached as you can see on your chart
ME: sometimes you see these huge short spikes on the chart, are those always correct?
Broker: There was no spike, the spread was wider due the NFP news release
ME: how can one see the spread at any given time?
Broker: You use for example the Min/Max Graph which will give you the valid quotes for order execution
Broker: Please have in mind that Candles are only used as price indicators to predict future price movements.
Broker: Candles give you only the average price per time period and cannot be used to see order executions
ME: what was the bid/ask at the time the stop got executed?
Broker: The quote was 1.55144/861
ME: how many pips wide is that spread?
Broker: the spread was 10 pips at this time
ME: thats a horrible spread especially for eur/usd
ME: thats more then 10x the .9 spread advertised
Broker: During news releases this a common spread
ME: y?
Broker: Please have in mind the spread are variable and spreads will widen during news releases
ME: if the spread was .9 at that time, would the stop still have been triggered?
Broker: No.

Chris Cooper clarifies:

There is a big difference between stops based on executed trades (ticks) and stops based on quotes (bid or ask). The forex market typically provides only quotes. If the liquidity providers at your trading venue all decide to back off for awhile, the inside bid/ask may move dramatically, because the liquidity has temporarily evaporated. This normally happens around major news releases, and around 5:00 p.m. Eastern time when trading quiets down. Using stops based on bid/ask at these times is suicidal. Don't blame the broker — it's your own fault for not knowing better.

Tom Marks remembers:

Tom MarksYears ago in my bumbling youth of a silver trader on the floor, I adventurously ventured from picking the low-lying fruit to be found in the pit and started to get an additional nocturnal fix trading with the dealers overnight.

And what a cagey lot they proved to be.

Given the itch, I would call up and they would make a five-cent market. Somewhat wider than the ordinary half-penny spread to be found during most of the daytime hours. That should have been the first clue, but, hey, I was young and impetuous.

So the would-be boy genius would make his gentleman's wager of five lots and implore his new best best on the other end of the line to kindly stop him out should the market make an adverse turn of 20 cents, a $5000 loss.

I did this about four times, paid my $20k in tuition at that stately School of Silliness before the lightbulb, however dim it might have been, finally lit up above my head.

Used to the (somewhat) organized chaos peculiar to the pit, I finally asked the guy about the times and sales. He explained that such niceties didn't exist in the midnight hour. It seems in that parallel universe prints held no sway and quotes were the order of the day.

I asked, OK, how many of you guys are playing in this card game? About three of us, he explained.

I smiled at that, however wanly, and waxed Nietzschean: Alright, they fleeced me, but didn't kill me, therefore I'm stronger.

That is, of course, until the next lesson rears its head. There are few things as continuing in life as continuing education.


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5 Comments so far

  1. Humbert Humbert on August 2, 2008 1:07 am

    Interesting…

    [Ed.: Your name reminds me of a Novel by Nabokov]. 

  2. Andy Waller on August 2, 2008 1:51 am

    Yes, I never use stops with FX because of the variable spread, which can be done if the leverage is very low.

    If my trades are 500pips out of profit I start to think about partially closing them. A 500pip drop registers as a drawdown of around 5%.

    FX is so volatile its just not worth hard stops, at the end of the day. Needless to say, I don’t use technical indicators at all. Never got into serious trouble with this kind of trading…

  3. Gangineni Dhananjhay on August 2, 2008 6:34 am

    As Vic and Laurel emphasize in EdSpec and PracSpec the vig and spread do the job 90% of the time. "Broker is there to convert your net worth into his own" and he strikes at the wrong time to close the the position and making margin calls.

  4. George Parkanyi on August 2, 2008 9:08 am

    I never use stops because I don't trade directionally, I allocate amongst (hopefully) non-correlated securities or oppositely correlated securities (outright hedges such as short ETFs).

    Correlation-based hedging, and of course reasonable diversification, is a much less aggravating way to mitigate total equity drawdown. When I look at the daily action in equities over the past year, directional and break-out traders on both sides of the market must be going stir-crazy.

    Getting stopped out frequently affects you psychologically as well. Nerves of steel that you DSers all have notwithstanding, it's always just that little bit harder to pull the trigger to re-enter after you've been already stopped out a couple of times. (Note that the go-to behavioural modification research technique on lab animals is electric shocks.) Say "Ow! (expletive)" a few times and you start to lose your appetite real fast, usually just before the big move.

    Cheers,
    George

  5. Manuel Bravochico on August 4, 2008 12:46 am

    Never use fx stops…silly. In leveraged fx trading,potentially lethal advice. Correlation as substitute for stops….ah yes….you are trading directionally too. The 100 year floods hit about every 5-10 years.

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