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Sudden Market Crashes – How Can Average Traders Protect Themselves in 2019?

market crash guaranteed stops

Mark Cheng

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The new year certainly got off to an exciting start. Apple’s earnings warning announcement did more than just ruffle a few feathers. It contributed to a huge currency crash that certainly gave investors some food for thought on what might be to come in 2019.

We spoke previously about certain key things to pay attention to this year as the world prepares for a market slowdown. Things have yet to fully settle down when it comes to trade agreements between the US and China, and if Apple is any indication of just how significant the impact can be, then you should definitely be praying that things get resolved amicably.

 

What exactly happened?

On 3 Jan, Apple released an earnings warning, basically to say “Hey guys we’re not going to earn as much as we thought we would.” This was a hugely significant announcement mostly because of the reasons why there was a profit readjustment.

How significant was the announcement? Well, the world’s most valuable company became the 4th most valuable company practically overnight. Concerns over the US-China trade war, fuelled by Apple’s weaker iPhone sales in China, not to mention the spillover effect to competitors like Samsung, Huawei and Xiaomi caused a big return to safe haven currencies like the Japanese Yen (JPY).

It didn’t help that the Japanese markets were closed over the New Year, so the yen rally was really just a one-sided surge. By Thursday evening, the USD/JPY rate was 107.66. The previous low in May 2018 was 108.11.

The question facing most of us average Singaporeans who are looking to invest in 2019 is this: how on earth are we supposed to deal with fluctuations like this when we are so far removed from the markets? It’s fair to say that not everyone has all the time in the world to go and read market news 24/7, and seeing “freak” events like this just serves to make people even more fearful of investing.

 

So what can investors do to mitigate the risk of “flash crashes”?

You might be familiar with stops by now, which is basically how most people protect themselves against a downturn in the market. Most platforms allow you to implement a stop level, which, if triggered, will close your position. This helps people to manage a risk in the event that they don’t have the time to monitor the market, or want to enforce some discipline in their trading. Stops can also help traders in the reverse way as well, allowing them to set a level to lock in profits.

But did you know that not all stops are made equal? Why is this so?

Stops act like a trigger, but that doesn’t necessarily mean that you will close your position at the exact level that your stop was set. Once the stop level is breached, your position will be closed regardless of price, which means that you might actually close at a level that is much worse than the actual stop level.

This is where guaranteed stops come into play. At the recently concluded IG Seminar – “How to trade through market slowdown”, there were several people who shared how the guaranteed stop feature helped save them a significant amount of cash when the flash crash happened. Here’s a very simple example using 3 clients – A, B and C to illustrate how being able to ensure your stop is executed exactly where you specified can make a big difference.

All 3 clients have an account balance of $60,000 each, holding an open Buy trade of 10 contracts on USD/JPY at 110.275.

During the USDJPY flash crash on 3 January 2019, most clients were closed out at 106.864, with the currency pair bottoming out at 104.727. Here’s a look at what would have happened:

Client A

guaranteed stop level at 108.4

Client B

non-guaranteed stop at 108.4

Client C

Did not place any stop for the position

Closed out levels Guaranteed stop level of 108.4 Next available price with slippage at 106.864. Lowest price recorded was 104.727.

 

Maximum loss: $23,725.40 $42,705.72 $69,405.48 (negative balance of $9,405.48)

As you can see from this simple illustration, just being able to execute your stop at the exact level can have a huge impact. It’s important to note that there is a cost to this, and every time your guaranteed stop is triggered, there is a premium to pay for this, but needless to say, the benefits far outweigh the cost of utilising guaranteed stops to protect your investments.

IG was one of the pioneers in the market for guaranteed stops, recognising the need for traders to be able to determine the exact point where they wanted to close their position. They also have developed a bunch of other risk management tools to complement this feature.

 

This isn’t going to be the last flash crash in 2019 so…

It’s important to recognise that while these incidents are bound to happen, it doesn’t mean that you should avoid trading altogether. Like we’ve mentioned before, there are a whole suite of tools available that can help average investors who don’t have a lot of time to spare to manage their investment activity.

IG’s platform also provides alerts on top of guaranteed stops to let you know about any significant movement and give you a better sense of when you need to make a decision, and there are different risk management tools that can help you to get through 2019 in a much more confident manner.

If you are still apprehensive about investing because of the risks involved, do check out our other article about how you can use IG’s technology to your advantage to make better investing decisions.

 

Related Articles:

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Mark Cheng

I rant and rave a lot, but when I'm not busy doing that, I'm managing the content for MoneySmart. I love Singapore, but I also believe in helping it to improve bit by bit, and that's where MoneySmart comes in. Have some thoughts? Drop me an email at [email protected]