For traders, a sudden "flash crash" such as a black swan event is definitely a major challenge in their trading career. For ordinary traders: a "flash crash" like a black swan event is a death warrant, under the situation of sharp rises and falls, it can easily lead to a margin call; while for black swan hunters: a "flash crash" like a black swan event is a money-sending market, under the situation of sharp rises and falls, it is a crazy profit. All foreign exchange traders hope to be able to turn danger into opportunity and gain huge profits in a "flash crash" like a black swan event, just like black swan hunters. So, what should we do exactly?
Today, the editor will share with you a genius foreign exchange trader, Matthew J. Slabosz, and see how he made a 60% profit in the Australian dollar flash crash event in January 2019! Below are his operation orders at that time and some experiences he summarized through reflection, hoping to help everyone reduce losses and increase profit opportunities when encountering similar flash crash events!
01 Australian Dollar Flash Crash Event
As shown in the figure below. In fact, such sudden flash crash events do occur in the foreign exchange market. During the Australian dollar crash, AUD/JPY was the most severely affected major currency pair, falling by 6.5% in just a few minutes, which is equivalent to a natural disaster in the foreign exchange market, as shown in the figure below:
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Many people believe that this crash was triggered by the sharp fall in Apple's stock price, which led to a surge in market risk aversion, and these orders were all operated due to the risk aversion mechanism triggered by machine algorithms.
Of course, this is just a guess, but the price fell by hundreds of points in less than five minutes, and it happened around the opening time of the Australian market (one of the lowest points of liquidity in the foreign exchange trading day). At that time, most large brokers were on a break, so the buyers did not have enough liquidity to absorb the large number of sell orders in the market, so the guess that the algorithm triggered the flash crash has some factual basis.In addition to discussing the reasons for the crash, for traders, the most important thing is to learn some lessons from it and learn how to deal with it.
02 Opportunities and Challenges Brought by the Flash Crash
1 Opportunity
What needs to be noted first is that this currency crisis is a huge opportunity for some traders.
Given a large amount of evidence suggesting that this was a flash crash caused by algorithms, it means that all Australian dollar and Japanese yen currency pairs experienced abnormally excessive increases in the morning, which is essentially an "accidental" price trend. However, no other markets were affected by this event, including the S&P 500 and Nasdaq, which means it was not a contagion event, only affecting the yen and Australian dollar. Therefore, traders can buy the Australian dollar at this time.
Generally speaking, after such an event occurs, there is a strong motivation for bulls to push the price back up, and there is no reason to let the price of the currency be greatly devalued for no reason.Therefore, at least for the next few days, there is a high likelihood of the market rising.
Indeed, within two days after the flash crash of the Australian dollar, the price did rise. The AUD/JPY closed the week at 77.213, which is about 150 pips higher than the average price a few hours before the flash crash, meaning it reached an astonishing 620 pips within two days.
2 Challenges
Although this is an excellent opportunity for traders to make money, it is also a significant challenge that can lead to substantial losses.
For example, traders who bought AUD/JPY without a stop loss would suffer substantial losses, including those who set a larger stop loss.
At that time, I opened a small short position in EUR/AUD on an account. Due to the sharp decline of the Australian dollar against the yen and the surge of the euro against the Australian dollar caused by other major currencies, the account initially suffered losses, but fortunately, it was within the risk I could bear. I don't know if the situation would be different if I had opened a larger position, or if I had gone long on AUD/JPY instead of short on EUR/AUD, or if I had chosen a different trading system.
But in any case, do not be complacent when trading. If we do not have a plan to deal with and respond to such events, it will not only be difficult to make money by taking advantage of it but will also result in a substantial loss.How to Deal with Black Swan Events?
1. Shift from Conservative to Appropriately Aggressive
I am a relatively conservative trader. In dealing with the Australian dollar collapse incident, due to the uncertainty of how the market would change afterwards, I only opened a small position and ended up making a small profit.
At that time, I made 33% profit in 15 minutes through a short position in the Euro/Australian dollar pair. Later, I realized that if I had moved my stop loss to the break-even point and held the position overnight, I could have made more than 150%. The profit in such a short period is astonishing. If you have a well-prepared response plan, it can help you make more money.
In fact, during that collapse, I was essentially in a state of trading interruption.At the beginning: I overlooked the persistent bearish trend of the AUD/JPY, thinking the market wouldn't change much, coupled with my personal inaptitude for short time frame trading, such as day trading.
Later on: The market indeed started to rebound, so I planned to trade again. Once the market begins to recover, it won't retrace in the short term.
Now is a good time to follow algorithmic operations on the 1-minute and 5-minute charts. As long as the price stays above key moving averages or key intraday levels, I will hold a larger position.
In the end: I achieved approximately 60% returns within two days.
2 Summary and ReflectionFor me, there are two main reasons for changing trading strategies:
1. I believe that when the market has just experienced a major black swan event, it will not immediately experience a second one.
2. Learn from previous mistakes and verify according to market changes.
Although I did make some mistakes in the process, such as repeatedly trying to short the AUD/JPY, thinking that an overbought situation had already occurred at that time. But when the market conditions changed, I quickly made adjustments.
Later, I printed out all the charts before and after this collapse of the Australian dollar, and studied them from time to time, in preparation for the next such event.
04 Trading ExampleThe goal of a trader is to make one good deal after another. A professional has stated that completing a good deal requires four factors: trading theory, order setup, market confirmation, and seizing opportunities.
The same is true when the Australian dollar plummets. Below, the author will analyze these four factors one by one, combining their own examples.
1. Trading Theory
During periods of low liquidity, algorithms can cause market collapses, causing prices to deviate significantly from the "normal value" range. This is not caused by a fundamental change in the global market outlook, and the Australian economy has not fallen into a sudden crisis.
Therefore, it is reasonable to assume that the price of the Australian dollar will rebound significantly or return to its original position.
2. Order Setup
Due to the rarity of precedents for such black swan events, it is difficult to formulate corresponding strategies. Therefore, in extreme market anomalies, caution and intuition are the best tools.Of course, if you really can't understand, just give up altogether.
However, if market conditions begin to change, one can leverage the abilities and skills of a trader to earn substantial profits, while ensuring that orders are within an appropriate risk level.
In terms of entry: When the price holds a key moving average that has recently become support or a key intraday level, one can buy, or simply buy when the price breaks through a consolidation pattern.
At that time, I used all three methods simultaneously and achieved good returns.
In terms of stop loss: Due to the volatility of the spread, I did not use a fixed stop loss, but instead observed the price performance based on my own judgment and then decided whether to close the position.Traders must decide where to enter a position and where to set their take-profit and stop-loss levels before opening a position, with take-profit being relatively more challenging. I myself have missed out on ten times the profit due to my choice of take-profit.
3 Market Confirmation
As retail forex traders, although we cannot see a summary of trading records like stock traders and cannot understand the order information of other traders, the price will never lie.
We can confirm by observing the price. If the price cannot break through and maintain below an obvious key intraday support level after repeated attempts, or if it breaks through and then recovers and maintains for a period of time, then the price does show signs of rising. My favorite setting is to test the 50-day exponential moving average (50EMA) on a higher time frame and the 1-minute 50EMA. Whenever the price shows an upward trend in these areas, I am ready to enter.
I completed my two biggest trades in the 5-minute 50EMA and 1-hour 50EMA tests. I think the reason why this is very effective is that trading algorithms seem to be the factor that causes price changes, and they tend to use indicators such as EMA to execute trades.
When the AUD/JPY tested the 1-hour 50EMA and formed a 1-hour bullish signal, that is, a consolidation pattern, I made a 15% profit in about an hour.When a higher low is formed on the 1-minute chart of the Australian dollar/Japanese yen, I exit immediately.
This trading strategy is considered very risky under normal circumstances, but during such special periods, the fluctuations are significant, and the buyers will definitely push the price to the daily resistance level.
Here are my specific operations:
After the price rebounded to 74.800, a false breakout formed within the bullish 15-minute flag pattern, and I decided to buy, setting a fixed stop loss of about 3%. Afterward, when the price rose faster than expected, I closed the position early.
Fortunately, after completing the first trade ahead of schedule, I found a second opportunity to place an order when the price reached 75.After conducting a bullish test on the convergence of the 5-minute and 1-minute 50EMA, I placed an order with a risk setting of 3%, and ultimately achieved a profit of 11%, even though I closed the position prematurely.
The next afternoon, after testing the 1-hour 50EMA, the price formed a higher low within a minute, so I placed another order again, setting the take-profit at the previous closing price of the 1-hour swing high. Soon after, I closed the position with a take-profit. After finding support at 76.00, the price then soared to 77.00, and I missed the biggest profit opportunity again.
However, due to being overly cautious and tired, in the end, I made a reasonable but smaller profit and decided not to enter the market again.
4. Seizing Opportunities
This is the direction I have been striving for. In some cases, I entered too late or left too early, which made me feel very frustrated.
In that Australian dollar crash incident, if I had been more focused and prepared, I would definitely have made higher profits than I do now.The key to seizing opportunities lies in capturing the moments to enter and exit trades.
On the 4HR chart, we have more time for planning and contemplation, but during the tense moments of a one-day trading session, we must always remain cautious and seize trading opportunities.
Exiting early under risk control will not have a serious impact, but entering too late may lead to losses.
I believe that as the number of trades increases and experience gradually accumulates, traders will perform better in seizing opportunities.
05 Finally
For foreign exchange traders, our goal is to achieve the maximum profit with the least loss. Black swan events like the Australian dollar collapse provide us with such opportunities.
Of course, the Australian dollar collapse is very likely to be an accidental event caused by algorithms, and it does not represent that subsequent events of this kind will have the same characteristics. Therefore, while we use collapses or black swan events to gain profits, we need to be more cautious and make good stop losses to avoid complacency and ending up with a blown account.
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