Friday, June 26, 2015

Is this another 'once in a lifetime' event?

As I type this, we still don't know the outcome of the ongoing negotiations between Greece and the EU/ECB/IMF 'troika', and the potential ramifications of any decision taken - from the political, economic or the financial markets point of view.

No doubt there will be traders seeking to profit from this situation, but we have already seen this year how an unexpected announcement created a major market event.

Back in January, we went through a supposed 'once in a lifetime' event with the extreme price moves on the EUR/CHF, and other related currency pairs. Now, less than six months later, we may be on the verge of another.

There are differences with this scenario. Some inexperienced traders may not have known there was an artificial price barrier on the EUR/CHF. In addition, the announcement was made totally unexpectedly - less than a month after the SNB said the price barrier was remaining in place. With the Greece situation, everyone knows there is an ongoing saga that could have profound consequences, and no-one can quantify the magnitude of any subsequent price movement.

While a traders goal is to make money, he also needs to manage risk.

Any announcement or rumour will be the catalyst for a significant price move in a short period of time. If an announcement or decision is made over the weekend, then there is a possibility of a price gap - maybe a big one. There is a very high chance of slippage on an announcement - where you place your stops may be totally irrelevant.

We saw in January how even traders who got the direction right still received margin calls because of the severity of the price gap and then volatility immediately thereafter.

And the shorter your timeframe the higher the risk, due to the tightness of your stops, position size relative to their equity etc.

It is quite possible that, in a weeks time, we may be wondering what all the fuss has been about - an agreement may be reached one way or another (or maybe not at all!), and the markets may have taken it in its stride.

On the other hand, this is an unprecedented situation. The rule makers never factored into their grand plan how things should work if a member decides to leave, or is thrown out of the EU. How will the markets react to a decision either way? What if they decide to 'kick the can' down the road for another six months?

Who knows?

So while the greedy trader may look on capitalise on a price movement in the immediate aftermath of any announcement, your primary motive should always continue to be controlling risk.

If this means staying in cash, then so be it. While you could potentially miss out on a big gain, you also eliminate the possibility of suffering a major drawdown, or even a blow up. Your call...

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