Brexit gives a lesson in forex risk management
- Last Friday was the greatest single day of FX market mayhem ever seen
- GBPUSD hit a low of 1.3230, in an historic slump of almost 12%!
- FX trading is a “long game” where risk/money management is absolutely critical
- Excessive leverage and failing to use stop losses is like visiting a casino
By Max McKegg
Once Brexit voting in the UK ended and early poll guesstimates came in (from limited samples) GBP (in particular) showed significant volatility. That was in early trading on Friday, at the start of Australasian trading.
By the time Asian markets opened, we started to receive some early voting results (which were only a miniscule snapshot of the total votes to be counted). And when this seemed to show that the “stay vote” might prevail (as had already been priced into Sterling in the days leading up to voting) GBPUSD traded up as high as 1.5020.
Early Asian trading was mislead into believing "stay" could prevail, pushing the pound higher until the "leave" count began to gain momentum, leading to an historic GBP crash. Photo: iStock
After consulting over the weekend with other fellow seasoned traders of many decades, it was agreed that was the greatest single day of market mayhem in forex that any of us has ever witnessed. In the week’s ahead there can anticipated to be news stories of trading distress in some companies and of course there will no doubt also be many individual tales of traders “blowing their trading accounts up” on “Brexit day”.
It is this last point which speaks to the lesson which can be learnt from Brexit day, something I have covered at length in articles throughout last year and something that will never change: forex trading is a “long game” where risk/money management is absolutely critical. It is not only vital to long term trading success but it is also crucial to ensure a trader’s survival (something Brexit day will have cruelly demonstrated to some).
I pursue forex trading as a business and operate it in this manner. Educated market speculation with effective risk/money management is what “I am all about”. In contrast, trading in a haphazard manner, employing too much leverage, failing to use or observe stop losses and lax money management – this is more like visiting a casino for an evening’s “fun”. No problem if trading for you is all about entertainment but it is if you want to make money as well.
My subscribers worldwide are constantly made aware of how strongly I emphasize risk/money management in the quest for long term trading success. I typically risk 1.5%/2.00% of my trading capital on a trading position, and whilst giving a trade every reasonable chance of success I will not let profits come “to far back on me” and will never let losses persist. These are the trading guidelines I “live or die” by.
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– Edited by Robert Ryan
Max McKegg is managing director of Technical Research Limited. Follow Max here or post your comment below to engage with Saxo Bank's social trading platform.