Winners and losers from SNB 'tidal wave'

At the one extreme were those retail FX traders who held long EURCHF trading positions based on the premise that the SNB had publicly declared (both in recent years and days) their commitment to defend the 1.2000 level on this cross rate “come what may” and had also repeatedly backed this up with the appropriate level of actual intervention in the market as well. This gave traders a “false” sense of security, believing that there was an effective “underwriting” of their long EURCHF trading positions.

FX trading at high levels of leverage are more like gambling than trading. Photo: Thinkstock

 

The recent Swiss National Bank’s “surprise announcement” brought about some real extremes in trader fortunes as a result of their sudden and unanticipated “change of mind”.

When the surprise announcement from the SNB came last week, prices fell like a bullet fired into the sky returning to the ground; with the EURCHF cross rate gapping to levels previously unimaginable on the day! By the time traders’ stop loss orders were triggered (and more particularly filled), the end result was horrific in many instances. I know of some small retail traders (not subscribers of mine than I am aware) who were wiped out completely.

At the other extreme, I had fortunately recommended and advised to sell USDCHF at 1.0215 with a stop just above 1.0240 on the very day of the surprise SNB announcement (see Short-term corrective sell-off for USDCHF) and many subscribers worldwide to my FX Trading/Forecasting services made “windfall” gains as a result. Yes, I expected a good sell-off in the ensuing days, but of course nothing like what actually eventuated.

Regardless of which side of the ledger traders were on, there are some important trading lessons to draw from this unusual event.

Firstly, the issue of trading leverage. I have already discussed this in my earlier article (How much trading leverage is too much?), where I indicated that a leverage factor of 3:1 was appropriate and that high levels of leverage are more akin to gambling than trading, and being over leveraged is a recipe for trading ruin. In the case of the SNB announcement, even if traders were on the wrong side of this historic event, it is where high leverage was employed that the results were truly horrific (not wishing to understate the severe damage caused even to the prudent but unfortunate traders employing modest leverage). I have an FX acquaintance of longstanding who had been trading successfully for many years but made one really bad decision (involving leverage and over commitment), and he lost so much of his trading capital as a result that he has never really fully recovered from this indiscretion.

Secondly, the choice of FX broker is very important at the best of times, but in the worst of times it is absolutely crucial, as this “event” has shown. Some of the more vulnerable brokerages have either gone bust or are under severe financial strain as a result. Others, like Saxobank, have been able to weather this storm more successfully. In fact, last September Saxobank was insightful in raising margin requirements on Swiss Franc positions (See Saxo Bank raises margin requirements on Swiss franc trading). Just as you must be careful in choosing which Bank you to do business with, so too must you choose your brokerage company with similar great care.

By Max McKegg – Edited by Robert Ryan