Catastrophic market events

[simonfudge]

Hi all
I am a new member. I am thinking about opening a S.B.account.
I am concerned about the possibility of the market gaping against me and suffering severe slippage on my stop loss.
I do not want the S.B. firm to be chasing me for the equity in my house !!!!
What strategies do you fine folks suggest to minimise the risks of a disaster?

 

[counter_violent]

Depending on your time frame for trading eg hours to days...you can place Guaranteed Stops with most S B firms...costs a little more in terms of spread....but for peace of mind may be worth it.

cv

 

[simcom]

I tend to keep positions open overnight and find that the additional cost of the guaranteed stop loss is worth it, if only for allowing me to sleep at night!

 

[tomorton]

Hi simonfudge - Good disicpline to always set an automatic stop-loss. This can be at a trading level, so that it will trigger if the trade starts to exceed your comfortable loss (you can work this out from the percentage of your total trading capital you are prepared to risk per trade: 2% is a common figure). The problem with these is that if you are consistently only a little out in setting the right trigger price you will find yourself stopped on the majority of your good trades, sometimes almost as soon as you have opened them.

Some people also set a 'catastrophe' stop, in case of very low probability calamities like major terror attack, presidential assassination, unexpected miltary aggression, or of you become suddenly hospitalised. This will be way beyond the expected trading range of your chosen instrument, but at least you won't lose the house.

Stockbrokers and the like insist that SB is high risk. They are only technically right. If you invest money through them, let's say £10,000 in shares, the maximum you can lose is therefore £10,000, and this risk is both known and fixed. However, if you short the Dow at £1 per point via SB, as there is no limit to how high the Dow might go, it is impossible to quantify your risk, so technically, yes, you have risked your house and all your chattels on this one modest position. SB companies however, actively promote the use of stops to their clients, which is one thing in their favour that does not appear to feature much in investment managers' promotional blurb. Its healthy to recall what Woody Allen said about stockbrokers - 'someone who will invest your money until it is all gone'.

 

[Chorlton]

Hi all
I am a new member. I am thinking about opening a S.B.account.
I am concerned about the possibility of the market gaping against me and suffering severe slippage on my stop loss.
I do not want the S.B. firm to be chasing me for the equity in my house !!!!
What strategies do you fine folks suggest to minimise the risks of a disaster?

1) Use Guaranteed Stops
2) Google "Portfolio Heat" and understand it.

Regards,

Chorlton

 

[simonfudge]

Thanks for all your replies.
I am familiar with conservative money management and guaranteed stop losses.
I am familiar with pairs trading and the concept of spreading risk.
Also, I guess I could just day trade to reduce exposure.

I was hoping that perhaps someone could come up with some other cunning plan, something that I was not familiar with or had not read about.

I am keen to discover all about 'portfolio heat'......
Again, many thanks to everyone who has taken the time and effort to help me....keep it coming please

 

[simonfudge]

Portfolio heat

1) Use Guaranteed Stops
2) Google "Portfolio Heat" and understand it.

Regards,

Chorlton

Thanks Chorlton for taking the time and effort to respond to my thread.

I did as you suggested and 'googled' portfolio heat.
I had thousands of hits. The page I opened defined 'portfolio heat' as

Portfolio Heat’ is the amount of money you would lose if you had to close every trade, at its stop loss price, across your entire portfolio.

I am not sure we are talking about the same thing here. Perhaps I am missing something or perhaps I should read more fully. However, the risk to open positions from a catastrophic market event is not just to stop loss positions.

Is it not the case that when long on a position the risk is... if the security went to zero? A dramatic fall could pass a stop loss price. The slippage could be enormous - literally to zero - Bear Sterns, Enron, Northern Rock, 9/11 ect, ect.

I am seeking strategies to protect me from catestrophic market events.


Thanks again
Simon

 

[Chorlton]

Thanks Chorlton for taking the time and effort to respond to my thread.

I did as you suggested and 'googled' portfolio heat.
I had thousands of hits. The page I opened defined 'portfolio heat' as

Portfolio Heat’ is the amount of money you would lose if you had to close every trade, at its stop loss price, across your entire portfolio.

I am not sure we are talking about the same thing here. Perhaps I am missing something or perhaps I should read more fully. However, the risk to open positions from a catastrophic market event is not just to stop loss positions.

Is it not the case that when long on a position the risk is... if the security went to zero? A dramatic fall could pass a stop loss price. The slippage could be enormous - literally to zero - Bear Sterns, Enron, Northern Rock, 9/11 ect, ect.

I am seeking strategies to protect me from catestrophic market events.


Thanks again
Simon

Hello Simon,

The explanation you have found is correct and yes, you are right that in a catastrophic event there is a high likelihood that stops would not be activated due to slippage, etc.

However, I wanted to include it in my reply for one particular reason. If such a Black Swan was to occur would you prefer, (i) to have only a particular amount of your capital invested at that particular time, or (ii) to be fully-invested in the Mrkt ??

If you are that concerned about trying to protect for Black Swan events in advance, I would (in addition to other more specific strategies) look to reduce your portfolio heat.

Chorlton

 

[simonfudge]

Portfolio heat

Hello Simon,

The explanation you have found is correct and yes, you are right that in a catastrophic event there is a high likelihood that stops would not be activated due to slippage, etc.

However, I wanted to include it in my reply for one particular reason. If such a Black Swan was to occur would you prefer, (i) to have only a particular amount of your capital invested at that particular time, or (ii) to be fully-invested in the Mrkt ??

If you are that concerned about trying to protect for Black Swan events in advance, I would (in addition to other more specific strategies) look to reduce your portfolio heat.

Chorlton

Hi Chorlton

I am grateful for your advice and I will read through some of the hits more thorougally.

Many thanks