Managing the Black Swan

As traders we do all we can to manage our risk on every single trade and on every single day, but what about occurrences that are totally out of our control? How do we deal with these and which markets are safe?

I will take you through a breakdown of some of the most commonly traded markets and include some of their outside risk factors.

Stocks: With trading stocks there are risks like the risk of gaps and the risk of earnings being the most common. The thing with earnings though is we know when they are coming so we can plan around it. Many major gaps come as the earnings are released after the close. We can understand and somewhat control this risk by simply not carrying a trade over an earnings or results date. This article is about the risks we can’t control and with stocks they are: terrorism, natural disasters and war being the most common.

Agriculture: With this product the risks really do lie mostly with Mother Nature. For example, if a major region that grows corn has substantially poor weather and a large percentage of the crop gets wiped out then this will send prices higher due to supply of the product dropping. It can happen suddenly and without much warning.

Oil: Oil is a product that has seen a major decline recently and there has been a lot of press. But it’s not been a major shock fall such as a terrorist attack or indeed, the news from the Swiss last month in the way that it has just traded lower but not fallen out of the sky. War is a threat for oil especially if the war happens to be in a major oil-producing nation and they are no longer able to provide a product.

Forex:  The Swiss currency, this no doubt will be the hottest topic going around the trading world for months to come. There will be stories of fortunes made and lost. One thing is certain; we will hear lots about what has happened about this particular currency. This is a risk that we do carry as FX traders, the threat of a central bank stepping in and making an out of the blue change. It goes without saying; this can cause major market moves and possible gaps in the market. There is also the risk of another “George Soros type trader” putting pressure on a currency to make it move too, such as his now famous trade on Sterling.

So with all this being said it may make you think that you should run for the shelter of cash and don’t trade at all. But this is not my message at all. As with all these major events, there are some winners and some losers, there are also many more people that are not affected at all by them. One day you may be on the losing side and on another day be on the winning side. For every business there is risk, and risk that can’t be planned for. Sometimes when these events happen we, as traders just have to understand them and move on. Blaming someone is often the first port of call for a loss but who do you point the finger at and for what gain? When a terrorist causes a major event that moves the market what good does it do the trader to question anyone other than the terrorist? When a storm wipes out crops and you are left with a bigger loss than expected do you get angry at the storm? Or when a central bank makes a change and you are left with a loss what good does it do to be negative? I know it’s the first emotion most of us will feel but it’s not going to help and it’s often not the fault of anyone, it’s just trading.

As traders we deal with risk every day and we manage it. On the odd occasion a Black Swan event comes and it’s up to us to deal with it, move on and have a great story to tell the grandchildren one day.

Happy trading!

Regards,
The TWP Team