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Trading Tip 8:A Warning to All Traders: Your Stop May Not Be a Stop
Anyone who has survived the forex trading wars and is still trading knows how important stops are to preserve capital and staying in the game.
As I noted in Use stops and Live to Trade Another Day
Stops are a necessary evil for any trader who wants to stay in the game. Some traders may try to avoid using stops but all it takes is one surprise headline and the game is over..
Stops are like an insurance policy to protect against a trade not working out. A stop is also protection against a surprise or an unexpected event
When a stop is not a stop
However, there are times when a stop is not a stop but an invitation to lose more than planned or even to see an account wiped out.
In the history of trading there are times when a currency, for example, gaps in a straight line and stops are executed far away from where they are placed. While not the norm, there are enough instances to have left the floor littered with blown accounts.
The one that comes to mind occurred on January 15, 2015 when the Swiss National Bank pulled its bid supporting EURCHF at 1.20 and what followed was a true black hole. No stop was safe and in fact many traders found themselves with negative margins when their positions were closed out, some as much as 20+% away from their stop level.. The range for that day was 1.2020-.8643 with most of the move occurring in minutes although there is a debate as to where the actual low was depending on the broker.
Source Quantitative Finance
While this was an extreme case to say the least it underscores when a stop is not a stop. Whether a stop is executed 50 pips, 100 pips, 200 pips or more from where it is placed, the results can be disastrous depending on the amount of leverage used
Time for traders to beware
This brings us to today’s market where attention is clearly focused on the results of the US election. As liquidity thins with trading driven by election headlines, even if you call the vote correctly you could easily get stopped out on a false start as news algos will rule the market. The issue is not getting stopped out but at what price.
A Warning to All Traders: Your Stop May Not Be a Stop
Now, to be clear, I am not suggesting to trade without a stop loss. Just be aware that the next few days will not be business as usual. There is a reason why implied options volatility has soared in currencies like the EURO and Mexican Peso to levels not seen since the 2016 U.S. presidential election.
So as a warning to all traders, especially those relatively new to the game, your stop may not be a stop as you are used to but don’t trade without one. Either reduce your leverage and widen your stop or sit back, enjoy the fireworks and look to trade once the dust settles.
Addendum: Feb 3, 2025
This USDCAD 5 minute chart is a good illustration of when a stop isn’t a stop in a news headline driven market.
Note, the last candle where stops were likely run on both sides.
Ask where stops were filled in this 5 minute candle.?
1.4584 => 1.4g24 _. 1.4520 => 1.4572 (close)
A Warning to All Traders: Your Stop May Not Be a Stop
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Newsquawk reported this a little while ago and it has since been doing the rounds,,, not ckear whether this is a factor but XAUUSD has retreated further from yesterday’s 2882 high
Source: Newsquawk.com
GBPUSD 4 HOUR CHART – Waiting for the BOE
My only question is why was GBPUSD bid at this time yesterday with a rate cut looming today.
What caught my eye at this time was the Power of 50 level after a high at 1.25496, so there is a method to my madness.
Note, a clue of a vulnerable GBPUSD, as I pointed out yesterday was GBP weakness vs the EUR and JPY, evident again today.
Back to charts
Move below 1.2463 breaks the upward momentum… back above this level would put 1.25 in play again.
Below 1.2378 would shift the risk back to this week’s low.
Re the BOE, a rate cut is widely expected and will not be a surprise.
Using my planform as a HEATMAP
Dollar is trading firmerm except vs JPY… but well within this week’s wide ranges
USDJPY back above 152 after brief dip below this pivotal level
GBPUSD softer ahead of expected BOE rate cut (note GBPJPY, EURGBP)
Bond yields are higher after plunging yesterday
Stocks are trading slightly firmer
Gold has backed off from yesterday’s record 2882 high… indicator of tariff sentiment?
