spikes!

[stevem12]

I realize that a serious spike doesn`t happen often, I can only think of three. But I would like to know what others feel is the best defense against an unexpected spike.

The general wisdom behind day trading is the ability to limit risk. But when an UNEXPECTED spike occurs, like the recent 2 and when the fed had an extra meeting a couple of years ago, and cut rates, it`s possible to be on the wrong end of a 250 point spike. ( or more in the case on Nas futures after that fed meeting)

My own belief is that if you wish to trade futures and therefore benefit from the hugh leverage, the only defense is to have a very large bank. By this I mean AT LEAST 100-150 full S+P points or 1000-1500 pts for the Dow.
2000 isn`t an extreme IMO.

This means a massive loss, can be withstood, from time to time. Of course you would expect to be the right side of some spikes, but Sod`s law says maybe not

Others views would be most welcome.

Steve

 

[Skimbleshanks]

You're looking on the doom and gloom side of things. That extra meeting was a one-off, and in view of what happened to the markets I doubt that they would do that again in a hurry.

Other news announcements are timetabled, and easy to access, so if you are worried just stay out of the market.

Trading is a game of risk. So you just have to weigh up the risk of that happening, and decide what you will do IF it ever happens while you are in an open trade.

Look at the previous spikes to understand what happens - news spikes (such as 9-11 and the plane flying into the Milan tower block) are V formations, and these go up almost, but not quite, as fast as they went down. So you either sit still in your position, or you hedge using another instrument.

Financial announcement spikes can be fun, and if you know what to look for the news is already in the market. Often you get three rapid movements on spikes - up, down, up for example, and often the price returns to where it started. Not all the time, but a lot of the time.

So just assess the risks, your money management rules, and decide whether you will trade or not.

Oh, and an old pair of brown trousers might come in handy for those 'special moments' that only trading gives you. :cheesy:

 

[Trader333]

One of the reasons I stopped trading futures was precisely because of this. On the day that the Fed made an unexpected interest rate cut the Nasdaq future market jumped hundreds of points in less than 10 seconds and a few people I know who had stops 10 points away got filled at over 250 points away from their stop. As Skim says it doesnt happen often but for me the risk is just too great. At least with a Level II direct access screen you can hit someone on the ask or bid and be filled in less than 2 seconds if something like this happens.


Paul

 

[Ghost Dog]

Skimbleshanks,

surely you can't sit in your position and wait for the upleg of the V because by then your stop will have been hit? In the case of something like 9-11 isn't all you can do is try to pick a moment to go long, having already lost thousands?

For small traders, even with a comfortable bank, you are facing ruin if you get it wrong. And how can we sqare a trade like that with a trading plan risking 1-2%?

There must be a measurable level of this kind of risk right now that is to some extent holding the market up, because it's in the back of the mind of any unhedged shorters that Saddam or Bin Laden could be found at any moment.

I've been told by a futures broker that even in a panic a stop would be filled with 'a few points slippage' on Liffe, because it's an electronic market, and a bid and offer will always be present. I have to say that I'm not so confident of the power of technology, especially after the whole exchange failed the other day.

Do any big traders/brokers out there know what would happen on Liffe if you were short with a ten point stop and Bin Laden was shot live on CNN?

I have to say that I don't, so I really shouldn't be trading futures.

 

[bonsai]

Ghost dog
I would classify that as a systemic risk and when it happens
I suspect there will be little you can do about it.

At the time it happens, by definition, very very few people will
know why its happened.

sb's will want to requote or delay or all of the above. And may
even cancel an exit trade on you.

In 'fast' markets just about anything can happen.
imo

PS: as for Bin Laden live on T.V, its at moments like that when
you find out that what you thought was a real time feed turns
out to have a slight delay in it.
and those guys can withdraw bid/offer quicker than the speed of light.

lol

 

[davelong]

Ghost Dog

Did you mean a large bank or brown trousers?

 

[Trader333]

I've been told by a futures broker that even in a panic a stop would be filled with 'a few points slippage' on Liffe, because it's an electronic market, and a bid and offer will always be present.

So is the Nasdaq and it didnt make a blind bit of difference. When news hits everyone at once tries to go with it. In the case of the Nasdaq everyone tried to buy at once and no-one was selling, if you were short then you joined everyone else trying to buy at the same time which just rocketed the market up. Dont assume you will be OK I know many got filled 250 points away from their stop.


Paul

 

[bonsai]

from memory, they can have up to 5 minutes grace before
having to rebid/offer.
can anyone confirm this ?

 

[oatman]

"A few points slippage". I once watched a mate get done for about 30 points in Ftse future just on some figures coming out. The pros have faster systems and you are in the queue. It's one of those things you must accept in markets. Even in non electronic days bids or offers were pulled at no notice. ie the first sign of something in the air. I did hear somewhere that the pros line up 2 orders for the release of figures eg 2000 lots buy and sell. One of them hits the button.
As for fast markets, they're a joke. Just a licence for floor traders to take your pants down, no questions asked. Well I'll rephrase that, you can ask all you like but they don't have to give explanations of fills.
Odds are, if you trade, you'll get caught one day.
Just be thankful you got a fill. There's nothing worse than wondering if you should hit the button into thin air.
You can always get back in.
Which is why I sometimes say,

Good luck

 

[JonnyT]

I would suggest that downward spikes are more vicious and more likely than upward spikes.

The Bin Laden scenario is not a spike as a spike is a temporary big move.

Spikes can be filtered intelligently, if its for real (i.e. Bin Laden being shot live on CNN) then there's nothing you can do. If you have a stop in place you will get a fill but like Paul said it could be many moons away.

For my swing trades I use SBs and the guarenteed stop option so that way I am protected to an extent. If you are day trading then you are at the mercy of the markets.

Naz I'm sure would argue you would see it coming on Level II and thus get a reasonable fill, whilst retail punters would take the brunt!!!

I would be interested to hear from any experienced Pro's concerning real life.

I know Sept11 2001 wasn't a big problem for UK traders as there was a sort of creeping effect and of course the US markets hadn't opened.

JonnyT

 

[bonsai]

the one saving grace is that with sb's, you can open a fixed limit trade.
for a price of course , everythings got a price.

but you would have to pay that premium every time you traded !

 

[Ghost Dog]

Bonsai, Paul,

I suspected it was that tricky. A lot of experienced traders are wiped out in the S&P pits every time there's a crash/panic buying. If they can't close, why should we assume we'll be able to?

I suppose it's highly unlikely that your broker will tell you "yes, there is always a chance your fragile account can be wiped out in ten seconds, your stop will be filled at the low of the day and you will be suicidal, have a nice day".

Maybe a saving grace of the sb companies, that you probably won't be using their dodgy stops anyway, and the spike might come back your way?

 

[bonsai]

Jonnyt
the only safe course is to keep your trade to within say 2 or 3%
of your risk capital. That may see you wiped out but at least it is no more than you have put up as risk in the first place.
It should be enough to protect your house etc.
(which should be protected through other devices anyway)

 

[bonsai]

Ghost dog
with sb's you would get an immediate margin call and if you
didnt respond immediately they would close your trade before the market recovered.
a lot of them set maximums to your account. You may need to
check the literature they sent you when you opened the account.
NTR's are only temporary things.

 

[Ghost Dog]

Bonsai,

hadn't thought of it like that. Another reason added to why I feel more comfortable with 1% than 2%. Although trading that small, the move shouldn't be enough to wipe you out?

Probably shouldn't feel so spooked, a sure sign that they've got you by the balls, but I have to admit to being a bit wary going short, especially on US.

They must find Bin Laden soon? If they do, it will make yesterday seem very tame.

 

[bonsai]

he may be dead already.
I'm more worried about what is going on around
Indonesia/Phillipines etc. He could be there ?
somebody is !

 

[ap29]

First post from me-Hello to all

Question:
If I am long e-mini s&p and a large downward spike hits am I liable for the total no of points lost [eg 100pts x $50 =$5000] or only the $3000 approx margin requirement for that contract. :|

 

[Trader333]

You are liable for the total number of points lost unless your broker has closed the trade at a certain loss level or you have a stop loss and it has been activated.


Paul

 

[2468steve]

ap29,
I don't wish to sound disrespectful or harsh,as this is an extremely helpful and friendly site,but if you are not clear on these points and need to ask, you really should not be trading just yet.

Steve

 

[Skimbleshanks]

ap29 - I presume from your Profile that you're currently trading CFDs and perhaps looking to trade futures? If that is the case, then there are a few differences between the two so you are wise to ask questions.

As T333 has said, you are liable for the drop, assuming that you panicked and exited right at the bottom! 100 point drops are almost unheard of, so your chances of being in a trade at that point is probably the same as your chances of being hit by lightening. :cheesy:

Have a look at the different types of spikes on charts - the news spikes tend to be sharply down then immediately sharply up, so if you did not have a stop in place then holding may be your best option until the price is restored. By news I mean world news broadcast on TV and radio, such as terrorism, plane attacks, etc - the ones which start "We're hearing a rumour that ... ". At that point traders don't know what the real story is, so they don't take any chances and just hit the sell buttons to exit their longs.

This happened not long after 9-11 when a light aircraft flew into a Milan towerblock in an accident rather than a terrorist attack. I was long at the time, and the market dived the fastest that I have ever seen it. I looked for the headline, and realised that once the US traders had thought to themselves: "Milan - where on earth is Milan? Oh, it's OK it's not the US it's in Italy, so that's all right," that the market would recover virtually as fast as it dropped, and it did. So I added to my longs on the way up, and ended up with a very nice juicy profit. Not every news item will be the same, of course, but you get the gist.

Figures announcements to do with interest rates and the economy are different - they are, 99 times out of 100, scheduled to occur so you just need to check each day to find out when the figures are announced, and either stay out of the market or learn to trade figures. On those days the spike tends to last for a couple of minutes, five at most, so just make sure that you time your trip to the loo away from figures announcements.

Of course, if you are trading without sufficient funds in your account then the only problem which would put a fly in the ointment is when you drop beneath your margin maintenance requirement; in the case of IB the trade is liquidated automatically so you would not have the benefit of being able to ride it out.

Oh, and welcome to T2W by the way!