Two weeks ago, Saudi Arabia and Russia decided they were no longer chums. The result sent shockwaves across the planet. Whilst that sounds dramatic, for many people the drama was real.
An instrument that typically moves a few percent in a day, then has a gap down of around ten times the average volatility.
How do you prepare for that? It blew up trading accounts globally and quite possibly brought down some institutions, as was the case when the Swiss National Bank unpegged the franc from the euro. I remember a trading story of two traders – both who had the same position – one who had their stop miraculously hit and the other didn’t and blew up. Through sheer luck, one was able to continue trading. And one ended up in sizable debt.
This is why risk management is so important. I recall a quote “risk is what you don’t” see – which is exactly right. In most cases, assessing what will go wrong will cover all the bases. But how many have been broadsided in this latest market crash, despite everyone knowing that stocks were overvalued and we’d had the greatest bull market of all time?
It’s a nice idea to…
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