Rapid market movements due to unexpected events may kill our trading account and lead to margin calls with dramatical effects. In such fast markets our stop losses may not work and possibly a normally excellent risk andmoney management fails.Even the "negative account balance protection" offered by some brokers will not be valid , as their customer agreements give no legal guarantee for the protection under unexpected events.
HOW SHOULD WE PROTECT OUR FUNDS IN VIEW OF THIS?
Usually we determine our order sizes and our total market exposition on basis of our account level , the stop loss magnitude and the estimated drawdown for the used trading strategy. We should additionally have
an upper limit for the number of open lots , which prevents a total loss of the account ( or some percentage like e.g. 50% ) in the very rare case of a wild spike as already described.For this we need an idea of the maximal size of such a spike , some size which already should be improbable , although in principle everything may be possible. A mere analysis of past quotes will not be sufficient . I donīt have data
on spikes in the past and 1m charts may be a substitute, , which I only have for the past weeks . On the other hand the daily candles of GBPUSD did not surpass 500 pips in the last twelve years , so that 500
may be used as such a maximal size. But does this gives some security for the future ? I believe that even a finer statistical analysis of the historical data will also give no decisive clue.
The opinion of experienced forex traders and of economists on the possible size of such spikes would
be of extreme importance and would be very wellcomed.
As a substitute for a better idea I meanwhile use a conservative view assuming 1000 or even 1500 pips as the maximal possible spikes and I restrict the market exposition by this , while applying usual methods ( like
fixed ratio ) for the calculation of the lot size.
HOW SHOULD WE PROTECT OUR FUNDS IN VIEW OF THIS?
Usually we determine our order sizes and our total market exposition on basis of our account level , the stop loss magnitude and the estimated drawdown for the used trading strategy. We should additionally have
an upper limit for the number of open lots , which prevents a total loss of the account ( or some percentage like e.g. 50% ) in the very rare case of a wild spike as already described.For this we need an idea of the maximal size of such a spike , some size which already should be improbable , although in principle everything may be possible. A mere analysis of past quotes will not be sufficient . I donīt have data
on spikes in the past and 1m charts may be a substitute, , which I only have for the past weeks . On the other hand the daily candles of GBPUSD did not surpass 500 pips in the last twelve years , so that 500
may be used as such a maximal size. But does this gives some security for the future ? I believe that even a finer statistical analysis of the historical data will also give no decisive clue.
The opinion of experienced forex traders and of economists on the possible size of such spikes would
be of extreme importance and would be very wellcomed.
As a substitute for a better idea I meanwhile use a conservative view assuming 1000 or even 1500 pips as the maximal possible spikes and I restrict the market exposition by this , while applying usual methods ( like
fixed ratio ) for the calculation of the lot size.