Following French Election EURUSD gap, I believe it is high time to discuss the ways how traders can avoid stop outs during high volatility based gaps.
AtoZForex – Those, who are longing EURUSD were celebrating the 180 pips Gap supported by the poll results. Yet, those who were shorting EURUSD were in chaos due to stop out, margin call or negative balances. This Sunday, France has been choosing its new President, at least the 1st round. Polls finished with Emmanuel Macron gathering 23.7 percent of the votes. Marine Le Pen managed to finish with 21.7 percent of the votes. Yagub Rahimov, NewsOgram CEO, stated:
“Despite the market fear since Friday’s market closing Euro USD French Election market opening was with a large gap at 1.0909zone, highest EURUSD level in 5 months, since November. The optimism was supported by the relief on Le Pen coming second.”
3 ways to avoid stop outs during high volatility based gaps
Hundreds of traders face a stop out or even had a negative balance during high impact market news. Thus, I have decided to discuss simple ways on how to avoid stop outs during high volatility based gaps. However, before we go through these points, let’s understand, what causes the "wipe-outs" during those wild moves in the market. When the supply and demand balance is broken due to an important event, volatility becomes too strong, often skipping orders. Such moves quite often also create Gaps in the market as well.
Therefore, the stop losses often do not operate during these events, and the so-called ‘slippage’ occurs. The consequences involve the trade exits occurrence in unexpectedly much worse or much better results. It is not just traders suffering from these events, brokers also sustain big losses during such market moving events. As an example, Alpari UK became insolvent on the 15 January 2015 SNB event, FXCM sustained multi-million USD loss and many other brokers went bankrupt.
What can traders do in order to prevent account blow outs?
#1 Lower the leverage
Leverage is the beginning and the end of the Forex dream for every retail trader.
Many Forex brokers will offer you very high leverage. However, traders must understand the risks associated with the leveraged trading. Some brokers offer even leverage above 1:1000 or even 1:2000. If you enter to the market with such leverage your chance of winning is have next to none. You might want to follow professional traders and their practices when it comes to leveraged trading. A professional equity manager will not exceed 1:3 leverage in any given News trading. Such leverage level would not drain your account when market fluctuations go wild.
#2 Utilize Guaranteed Stops
Some Forex brokers can offer you guaranteed stops. Normally, this option comes with a price of a higher spread and/or higher commission on a trade. However, some experts believe that traders that are using guarantee stops will find themselves in the worse situation that those, who utilize normal stops over time.
Nevertheless, guaranteed stops will protect your account from a sudden move in the market. However, also bare in mind that a TRUE STP FOREX BROKER WILL NOT OFFER STOP LOSS GUARANTEE.
#3 Closely eye the financial news for hints
You need to closely eye the financial news related to the currency that you think can experience the sudden move. For instance, prior to the SNB Black Swan event, there were a number of experts warning about the Swiss Franc and the possibility of an unexpected shift in the value of the currency.
Where first two points might be a little too much to handle for some Forex traders, the last advice is just right for any trader. Forex traders can identify the currencies that are prone to a drastic move by just monitoring the currency’s country of origin central bank's announcements.
Stop loss orders: Important facts
In the next part, I would like to focus your attention on the stop-loss orders and the mistakes that traders make, while using them.
Traders determine the price level of their orders depending on their ability to assess how and when the level will be triggered. One of the key concerns during the high volatility times is associated with the decreased liquidity. Traders worry that the limits might suddenly take place in ‘abnormal’ market behavior condition. I've asked personally to Yagub Rahimov, the Best Forex Trainer 2017 about how to handle Stop Loss, Take Profit and Pending orders before or during the news announcements:
"In my trainings, we strongly advise new traders to avoid news trading as it involves extra risk. However, if you are planning to place a pending order, it is always better to place a pending LIMIT order instead of STOP orders.
Volatility tends to increase during the news times, with so many bucket shop traders around traders really do not stand much chance. Hence, not having a stop loss is often much better than having one. On the other hand, having a TP might be beneficial. "
Yury Sofranau, the multi-million private equity trader and AtoZ Forex Chief Currency Strategist, believes that the smart traders have reduced use of Stop Orders. Since the Swiss National Bank decided to stop interfering in the EURCHF market in 2015 more and more traders have started using limit orders.
Meanwhile, Quyen Nong, AtoZForex Project Lead, believes that Forex brokers have been warning clients against using stops. He explains:
"Events such as the BREXIT referendum and the US presidential election have proven that Stop Orders can not be a proper risk-management tool. Of course, many of the brokers got to understand this issue the hard way. In true STP or DMA environment no price is guaranteed. Any instrument may and will gap or accelerate so rapidly that many orders will be filled with much different price than what you have aimed for.
While most regulators are pushing brokers to have Negative Balance protection, brokers still sustains those losses. The only way for these brokers to avoid such unexpected losses is educating traders."
Stop loss precautions
Yury Sofranau further stated that there are sophisticated algorithms that can reflect market conditions. Such algorithmic strategies follow prices and can improve stop loss orders. One of the key ways to avoid stop outs during high volatility based gaps is to use stop-limit orders. However, he also cautions that the stop order might not be filled:
"Traders must understand. If the price is not there, nobody can really guarantee it.
Such lack of liquidity is can only guarantee disaster for traders using stops with poor management.
Since the market will be acting like a grasshopper, using Stop Loss orders will get results at a dramatically different price than whatever you were expecting. However, using Take Profit can be beneficial."
Quyen Nong of AtoZForex meanwhile states that a lot of traders are mistaken. They believe that once they place a stop loss order, they have protection from any market fluctuations. The efficiency of the stop-loss order is depending on the type of the stop-loss the client places, which bank (liquidity provider) is filling the order and the current market conditions. He further adds:
"Just imagine. As if the market is a battlefield.
Once the market becomes a completely one-way street with everyone rushing to close their orders, there will be a little liquidity available. What else can you expect?”
Mr. Nong agreeing to this point of view. He added that he would not place a stop-loss order with a broker without making sure he understands how the broker manages the stop-loss order. But, he also says he would use 1:2 leverage and have Take Profit orders in any case if he had to have an order. This is the only way avoid stop outs during high volatility based gaps.
Think we missed something? Do you know any other ways to avoid stop outs during high volatility based gaps? Let us know in the comments section below.