The crescendo trade…

Written by Published in Charlie Burton

If you’ve ever watched the program ‘air crash investigation’ on the National Geographic channel, you may see similarities with some accidents with trading errors too.

When watching this program, it becomes apparent that a great deal of accidents were preventable at the time. The problem appears to be a sequence of events which take place before the inevitable crash occurs. If just one of these events were prevented from happening, often it would be enough to save the plane from disaster.

With trading disasters, it’s very similar in that there’s often a sequence of events that take place before an account takes that big loss, not just a single mistake. Let me give you a very real example. This took place just a few weeks ago from when this trader told me what happened. I’m going on memory of what took place so small details could be wrong, but the main story is correct…

He was in the middle of changing his baby’s nappy when a trade he had been looking at set up for him to buy. It was on the GBPAUD at the time I believe. He took the trade but forgot to place his stop because of the distraction of looking after his baby.

It was a day later that he realised he had not placed a stop because he was now considerably underwater beyond where he would have been had a stop been in place. Rather than accepting he had made the mistake and cutting the position immediately, he decided to wait and see if the market would still come back up for him. It didn’t. A few days passed and he was now down 250 pips on a position that should have had a stop at 80 pips.

Again he still could have closed the position but instead he decided to add to bring his average price down. Hoping now that his new entry would save the day if the GBP rallied, he sat and waited over the next several days and then the flash crash took place overnight. He was literally a few pips from having a margin call during that night but fortunately the pound did bounce back, but only enough so that his entire account wasn’t wiped out.

He got in touch with me that following day for advice because he was now vastly underwater due to adding to the loser and without a stop. The best advice I could give is for him to accept the huge loss, close the position and be thankful his entire account wasn’t wiped out, even if 70% still was.

I haven’t heard back from this gentleman so don’t know if he did indeed close his position or not. But just like in so many plane crashes, there were plenty of opportunities for this trader to have not got into this situation. What started out as placing a simple trade whilst changing a nappy climaxed into a potential account killer as a result of a stream of poor choices. This true story is the type of thing that happens around the world daily with traders. I call these the crescendo trade because of how it builds out of nothing into something so big, and yet just like in air crash investigation, it is entirely preventable….

Moving over to the markets, there’s nothing of great interest for me this week so I will re-iterate the view from last week’s that the USDJPY still looks good for more upside and that a solid pullback is what I’m continuing to look for in order to establish a long…

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Charlie Burton

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