By definition, black swan events are unexpected and intensely difficult to predict. It’s possible that we could see huge gaps, wild swings, and increased volatility during big events… or we could see no movement in any respect.
Remember the time when the Swiss National Bank (SNB) surprised the markets with the choice to stop defending EUR/CHF’s 1.2000 floor?
The move went down in history as a Black Swan event, an unpredictable, unexpected event that had significant impact across financial markets.
The SNB’s decision cost many market players lots of money, and even forced some brokers and other financial institutions to close shop for lack of capital.
Average Joe retail traders also got caught within the SNB’s storm. We’ve heard stories of trades that got triggered a whole bunch of pips away from their orders, brokers who are actually incommunicado, and investors who’ve lost every part however the shirt on their backs.
So how will you protect yourself from black swan event losses? Or how will you pick yourself up out of your trading losses?
Listed here are three things you may do:
1. Manage your risk
It is a no-brainer. The primary defense against unpredictable, unexpected events is limiting your potential losses.
Use stop losses in every trade and all the time concentrate on your account exposure. Ensure that you don’t put all of your eggs in a single basket.
If anything, trade many small, uncorrelated positions and get greater provided that the trade goes your way and also you expect it to maintain going. Most significantly, NEVER risk money you could’t afford to lose.
2. Be told
Do your research and ask your broker to make clear any concerns you have got. When you can’t contact your broker, try interacting with trading communities in case someone has more information.
When you’re certainly one of the unlucky souls who’ve sustained significant losses and have brokers who suddenly aren’t available, then the primary best step is to discuss with regulatory agencies to know your rights as a client.
Simply because you may’t predict the markets doesn’t mean you could’t predict what could occur to your hard-earned profits within the event of one other black swan.
3. Construct your account back up
When you’ve accepted your losses and done your homework for future trades, all that’s left to do is to select up the pieces and construct your account back up.
Trade demo accounts when you can’t afford one other live account yet. That way you may still fine-tune your processes and keep your trading skills sharp.
Either way, the most effective technique to protect your account is to be prepared for as many scenarios as you may and to all the time manage your risk.