Black Swan Events

[Paulie_5]

This may be a stupid question but ....

What is the best strategy in a 'Black Swan' event ?

I can only think of one event since I have been trading in the last year ... on the 28th March 08, some big trader fat fingered the Bund causing a 150 tick move. Fortunately I wasn't in a position at the time.

Of course you have big moves at NFP, ir decisions etc ... but you can choose to stay out of the market providing you are aware of when the announcements are going to happen.

But supposing you are in a position at a quiet time of the day, completely 'average' trading conditions .. then something like the fat finger example happens. Or a massive shift that you have absolutely no idea why it has happened.

Should you :

- hold onto the position in the hope that the market will return to it's fair value.
(but therefore risking further losses)

or

- close the position, take a massive loss (potentially half of your account) and put it down to an unavoidable side effect of trading ?

(by the way, I use manual stops - so I wouldn't be able to react in time)


I have too little experience to know what the 'normal' market reaction to such an event is or what you should do.


Has anyone been caught in such an event ? What did you do ?


Many thanks


Paulie

 

[littlemog]

I did. Some stock I got in was on a ride up, then gapped down 25% the next night. I chose to cut my losses and get out at market price. My strategy then and now? - Position sizing. There's a of discussion on money management in here so look around if you want.

I found that starting small in relation to your account (e.g. 2%) in any trade can help minimize these black swans, even should a trail of them occur.

 

[arabianights]

On something like the bund fat finger, which was clearly only going on in one market I would have bought more, I'd never have stopped myself out. As it was I wasn't trading bunds at the time and hadn't noticed anything was happening until it was suspended

But you can't come up with a generalised strategy for black swans, unfortunately, particularly because a 'proper' black swan isn't anticipated in advance. Generalised strategy for fat fingers, yes - hold on and take more if possible. Actually I usually have resting orders well way from the market because they happen quite a lot...

 

[Paulie_5]

Thanks for the replies - much appreciated

 

[foredog]

This may be a stupid question but ....

What is the best strategy in a 'Black Swan' event ?


Should you :

- hold onto the position in the hope that the market will return to it's fair value.
(but therefore risking further losses)

What if it's not a fake and keeps dropping?

or

- close the position, take a massive loss (potentially half of your account) and put it down to an unavoidable side effect of trading ?

(by the way, I use manual stops - so I wouldn't be able to react in time)

Have and electronic stop, it's easier to re-enter a trade if you get stopped out on a spike than to have to make 25% of your account back becasue the market crapped out while you were making a cup of tea.

and if you're with a reputable form then there won't be any "stop hunting "etc by your broker







Paulie

hope this helps

 

[arabianights]

foredog I have to disagree, some of these fat fingers it will be the mechanical at-market stop that wipes you out.

 

[foredog]

see what you mean, if the market gaps 50 pts in a second even if you're stop is only 5pts from price it may still trade at -50pts.

I guess it's just one of those 50/50 things, either way you're going to get caught out sometimes, just hopefully not too often

 

[GammaJammer]

It's a lot harder when you have no idea what has caused the move. At least if it's some unanticipated but genuine fundamental / geopolitical event or whatever, you can re-asses your positioning in light of the new information.

But the bund fat finger incident represents a great opportunity only if you know immediately that's what it is I guess.

 

[arabianights]

It really depends on how much information you have as well. If you're watching the market and you can see it's cascading stops then it's one thing... if you've got no info or aren't there then I suppose you have to rely on an automated stop.

 

[Paulie_5]

What if it's not a fake and keeps dropping?

Would it be wrong though to think, if you are caught in an instantaneous 50 pts gap and lost say 25% of your account, that you may as well at that stage "see what happens". You've lost so much anyway, wouldn't it be worth just sitting back and trying to figure out what the hell's going on ... But it seems like the general consensus is just get out - it's one of those things.

Arabian - I don't think I'd feel comfortable adding, I don't think in the heat of the situation, with my inexperience, I would have the balls ...

Paulie

 

[gooseman]

most people in the market will have seen the reaction on a fat finger and so can react accordingly (i.e. build the position) or if it is a macro event then your news feed/squawk will let you know what is going on if it gets out of daily ranges. if there is some event (NFP etc) that can cause a huge move then you should know about it, otherwise aside from 9/11's & 7/7's unexpected massive arket moves are far and few between really.

other than that it boils down to position/money management.

 

[GammaJammer]

Surely in a market as (relatively) liquid as rates, if even a simple fat finger trade can cause a move equal to 25% of your account size, aren't you trading way way too large?

 

[MainCycleV]

just like a traffic accident or earthquake. You can do nothing but continue as normal, that is to say, hold onto the position, waiting for the mark back to normal, since the big fat cats have also been hit.

 

[arabianights]

Surely in a market as (relatively) liquid as rates, if even a simple fat finger trade can cause a move equal to 25% of your account size, aren't you trading way way too large?

Last December the entire Short Sterling strip was sold, corresponding to 1.5% movement... similar happened in Eurodollar in the November...

Rates aren't that liquid anymore. I could take the entire short sterling strip out with 30 000 lots even in these far more liquid that 3 months ago conditions.

 

[arabianights]

E.G. Front month short sterling, normally what you would expect to be most liquid, has 3880 lots below market and that's a 99 tick range too.

4672 above market, 89 tick range.

 

[TheBramble]

A Black Swan is by definition unexpected so it’s not a case of analysing news and information flow prior to. Neither is it too much use analysing it in the immediate or short-term aftermath as the rationale is always constructed post hoc and is unlikely to be the real basis for the move, and is largely irrelevant to you in any event.

If you’re on the wrong side of one of these, it’s like any other trade that moves against you – you get out – minimise your losses. Yes, it may well immediately reverse, but as you have no idea what caused it, you have no idea what it might do next. Assume the worst. Get out. Preserve capital.

If you’re on the other side of the Swanie and looking amazingly positive, I personally take the opposite view, it’s more likely to reverse than not and I’ll grab my windfall. Assume the worst. Preserve capital.

 

[Paulie_5]

So looking at the example I had in mind ....

I trade the Bund with a 3 tick stop which is approximately 1% of my account.
(bear in mind that the daily range is normally 50-100 ticks)
A fat finger of 44,000 lots on 28th March 2008 moved the market 150 ticks instantaneously .....
(These facts are from memory, I had only just started trading then and wasn't in a position at the time)
So that's 50% of my account ....

Close the position and cry like a baby ?!

 

[foredog]

If it's not a fatfinger though and keeps going down it could be 100% of your account and maybe more if your broker doesn't automatically close your position.

Maybe the answer is to watch for a few seconds and if it starts to push lower again then get out, if not trail the stop on the retracement

 

[arabianights]

but that case obviously was a fat finger!

 

[richi rich]

Close the position and cry like a baby ?!

hunt him down n cut off his 'fat finger'