"Certain" is not certain - there is no free lunch

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Options Trading

There is no free lunch

I would like to put forward that I absolutely feel solidarity with everyone who lost on this case. Even the issue of the Swiss franc is a very sensitive question. Many of us thought that it was the safest currency and also public policy decisions complicate even-tempered handling of the issue. As traders, instead of licking our wounds, we may want to draw a few lessons from this experience.

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There is no free lunch

In short, all that happened was that the 1.2 EUR/CHF minimum rate established in September 2011, was discontinued by the Swiss central bank. For more than 3 years everyone was sure that the EUR/CHF rate could not be lower than 1.20. I intentionally do not write about the economic reasons and the background because the media is full of this. Surely, they had a good reason to do this, even if many people do not agree with this step.

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1. Nothing is "sure" in the market

The central bank does not guarantee any level of the exchange rate. Incredibly, many people played on the EUR/CHF rise, saying that the central bank would not allow the exchange rate to go below 1.20. This was true for more than 3 years. No one could realistically believe that this would be maintained forever. Despite that fact, many people traded on it, because it seemed that they could not lose because the central bank was standing there …

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1. Nothing is "sure" in the market

I always answered to these questions by saying that there is no such thing as a free lunch. I would never write out a Put there, because it is impossible to know how long the level will be kept.

Losses suffered in options trading taught me that there is no "nut", there is no Holy Grail.

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2. High leverage is a double-edged sword

This concerns mainly Forex traders. It is not uncommon for someone to trade with 1:100, 1:200 leverage, with or without stop loss. This can be fatal during such an event. I know that high leverage can make high profits, but the opposite is also true. For example, if I manage hedge funds, I am sure I would not let my traders trade with a FX leverage higher than 1:10 and only with a certain proportion of the total portfolio.

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2. High leverage is a double-edged sword

Obviously, this is the mistake of FX brokerage firms, too. It is not accidental either, that many people now head for bankruptcy. I think, companies like Alpari - whose customers traded with high leverage and they lost a lot more than their account balance - will continuously go bankrupt. I suspect that FCA and other applicable regulations sometimes valid for FX brokerage firms will be tightened. I'd be surprised if you could open an account with a 1:500 leverage anywhere after this.

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3. The stop order is not risk management

Wherever you stop was at the time of the intervention, it was definitely not executed there. Practical loss exceeded the theoretical loss defined by the stop. Such market move can be handled only with options, nothing else will protect against it.

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4. The safest place for your money is a regulated environment

There is a huge difference between an average FX brokerage firm (e.g. Alpari) and a regulated market participant (e.g. Interactive Brokers).

At IB, the individual trading account is secured up to $ 500,000, so in case of potential loss, the money will not float away. It is worth considering where you keep your money.

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5. The risk cannot be avoided, it should rather be managed

The fact that it may happen does not mean that you have to run away from the market. It means only that you have to manage risks more consciously. There are two types of risks: partner and strategic risk. So it does matter where you keep your money and what kind of product you trade, with what kind of strategy. I think, options remain the best risk management tools. Investors who had options at this time, were not hurt at all ...

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6. Trade only with products that you know!

I have received a lot of email and phone calls with negative reports from my clients in connection with the incident. Unfortunately, not only those had losses who had open positions in CHF, but also those who had contracts in related products, for example. EUR/USD, or emerging-market currencies such as EUR, PLN, etc. On my trainings, I keep saying a lot that the most important thing is to know the product you are trading.

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6. Trade only with products that you know!

Get to know the demand and supply side, the trading environment, the macro environment, everything you can learn about it. Now, there are traders who have open positions in 5 currencies at the same time, I doubt that they know all of them.

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6. Trade only with products that you know!

I mention only in brackets that perhaps Forex is one of the most difficult products as far as macro analysis is concerned. A commodity market (e.g. natural gas, oil, wheat, etc.) can be better analyzed both in terms of supply and demand, and seasonality.

Natural gas for example, has much less factors than EUR/USD ... that is why I think that FX is one of the most difficult markets to trade in.

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Summary

If you are able to learn from this experience, you can be more successful in the future. If the situation affected you negatively, I'm sorry for that, and I sympathize with you, but if you give up here, you'll never be a professional trader!Take a little break and think about all the above. There are many situations in your life where a total paradigm shift is happening. The SNB's intervention was similar even for the pros. Last week, confidence in one of the most prestigious central banks wavered. The after-effects are little known at the time being. With options, we can make profitable trades with low-risk, but we have to accept that there is no such thing as free lunch ...

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What's next?

Ask yourself the following questions, even if the incident did not affect you negatively:

Where do I keep my money, how big is the partner risk?How do my risk management methods work?Do I really know the product that I trade? (If you do not trade youself, does your broker know it?)Does the current level of leverage mean an acceptable risk for me?

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What's next?

I hope the above could put things in place a little. If you need any help regarding risk management or trading questions, please feel free to contact me. And if you're thinking about making a change after a small stopover, using options is really worth considering. It is not accidental that I never trade on the spot market using stop loss...

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Feel free to ask me!

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Email: gery@optionsrules.comMy webpage: http://www.optionsrules.com/

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