Thursday, January 15, 2015

An extreme event - and an extreme profit!

We are not even all of the way through January, and already we've had enough excitement to last us the next 12 months!

The beauty of trend following is that you simply place your bets based on what your method is telling you, control your risk and let the trade play itself out.

After all, how would anyone know that crude oil could fall from over $100 to below $50 in a few months? The risk is controlled as tightly as possible, yet the potential profits were not restricted in anyway.

Once in a while , an extreme event comes along with trend followers can profit hugely from. Trend followers never predict what can happen - they are playing the odds. Today, we saw one of the most extreme examples of this play itself out.

This morning, the Swiss National Bank made the unexpected announcement that the ceiling on which the Swiss Franc can move against the Euro was being removed. This created massive price moves on the world markets.

Well, two traders (Paul H and Fred F) who work together closely in our mentoring group had noticed the significant contraction in volatility on the EUR/CHF over the last few days. As a result of this, they had been faithfully placing orders to open every day over the last week or so which would trigger a position on a break below the recent lows right around the critical 1.20 level, totally oblivious to what was about to happen. This morning, their order was triggered immediately on the release of the announcement, with almost no slippage. Paul even tweeted the set up in our group a couple of days ago:


Price had fallen to the critical support level over the preceding weeks, and was now crawling along it. It was almost like it was waiting for something to happen. Then price went through the support level and their order was triggered.

I know the size of the profit made (in terms of R), and it knocks my 'measly' 5R profit I banked yesterday on a US stock into a cocked hat. At one point in the immediate aftermath of the announcement, the profit generated was well in excess of 100R...

Some people might think that the trade was foolhardy given that the SNB had this price support level fixed for the last three years. But this sort of thing has happened before, and will happen again.

A comparison can be made here to a trade made by Michael Marcus which he talks about in his Market Wizards interview. He refers to a trade in plywood back in the 1970's when commodity price controls were in place, and in theory the price of plywood could not exceed $100. Well, one day, it did exceed that price, he went long and price went all the way up to $200.

In the foreign exchange arena, Randy McKay talked about a trade involving the British pound in 1976 when the UK government at the time was defending it from breaching a certain price level against the US Dollar. His interview is in New Market Wizards. So, while this sort of event is unusual, it is not without precedent. What WAS unusual in this instance was the sheer speed and magnitude of the price movement.

Others might say they were lucky - my response to that is that they were simply following the process, the entry rules and risk parameters. Good traders generally make their own luck. Here is a copy of Paul's trading diary's entry for today which he has emailed me to use here:


People like this, who are diligent in what they do, and treat trading like a business rather than a hobby, will ultimately obtain their rewards.

Today's events just go to confirm that ANYTHING can happen in the markets.

If you would like to join Paul and Fred in our group and learn how we go about trend following, then click here for details.

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