"Black Swans on Forex" - the webinar that was waiting
“In my entire professional life, I have never had a serious accident. For all my years at sea, I have seen only one ship in distress. "I have never seen a crash, I have not experienced a crash, I have not been in a situation that threatened disaster."
E.J. Smith, Captain of the Titanic, 1907
In 1912, Captain Smith's ship suffered the most famous shipwreck in human history.
Events that no one expected: September 11, 2001, the collapse of the US stock market in 1987, the decoupling of the Franc from the euro on January 15, 2015.
Nothing portends trouble, and here comes the so-called "Black Swan" - an anomalous event that is knocked out of statistics. Such events rarely occur, but their consequences can be colossal.
01/15/15 even some brokers went bankrupt as a result of a jump in the USDCHF rate. What can we say about simple traders, such as you and me.
How to prepare for such events on Forex? How to make your strategy able to withstand (and even earn) such events? This will be discussed at the Black Swans on Forex webinar.
What will happen at the webinar
The author of the Black Swan concept is Nassim Taleb, a well-known scientist and economist, a former trader. Best-selling author of Black Swan. Under the sign of unpredictability ”,“ Fooled by chance ”and“ Anti-fragility. How to capitalize on chaos. "
At the webinar we will discuss how you can apply the ideas from his books to the field of Forex trading.
- What is the "Black" and "Gray" swans
- Can they be good?
- Why do people blindly miss the Black Swans
- Swans on Forex and how to make money on them
- What is Antifragility, how to make your strategy Antifragility
Watch the webinar on record
Hello, ladies and gentlemen, Forex traders! The black swan is an unexpected event that has a great impact. Where did the term come from? The fact is that before the discovery of Australia, the inhabitants of the old world were convinced that all swans were white. Therefore, they were very surprised to see the first black swan, which was for them the very surprise that broke the prevailing stereotype. Accordingly, this metaphor is used to describe abnormal, unexpected and major events.
The author of the concept of the black swan is Nassim Taleb, who recently arrived with a lecture in Moscow. For several years he was an option trader, but now he is listed as a scientific advisor to the investment hedge fund Universa Investments. According to the Wall Street Journal, in 2015 they earned more than $ 1 billion against the backdrop of a surge in market volatility.
The fund’s strategy consists precisely in catching such rare events and making money on them. Accordingly, profit growth is far from smooth, but occurs with sharp surges. In general, Nassim Taleb refutes the usefulness of such well-known economic indicators as the Sharpe ratio and many others, thereby showing us that the role of chance in all spheres of life is greatly understated, and the role of simple luck is very large.
What kind of black swan?
In general, there are 3 characteristics of this event:
- Firstly, this event is anomalous, since nothing in the past foreshadowed it;
- Secondly, this event has tremendous impact;
- Thirdly, human nature makes us come up with an explanation of what happened after the fact of the event, making it explainable and predictable. I think all of you have seen examples when the day after the event, journalists come up with excuses for him and what was the reason. In this regard, it creates a false impression, as if it could be predicted.
Examples of Black Swans
Let's start with the most famous stock market crash - black Monday 1987. The American Stock Exchange has been recovering for a long time after such a fall. The situation is very unusual for the US stock market, and it is one of the most famous black swans in the history of the economy.
You may have heard the story of trader Nick Lisson, who in 1995 became the culprit in the bankruptcy of Baring Bank, one of the largest in its time. He carefully concealed huge trade losses, but at some point it was no longer possible to hide losses.
In January 2008, a trader at the Paris bank Societe Generale placed almost $ 7 billion on the market. As a result of opening positions exceeding the limits, the market collapsed by 10%, and the bank lost almost $ 6 billion. For the bank, this event turned out to be the black swan.
Now to the events closer to us. The GBPUSD chart below shows two key events. The first event is Brexit; the second is on October 7, part-time Putin’s birthday, where we observed the effect of a “fat finger” or a simple technical malfunction.
In fact, Brexit is more likely a gray swan. The gray swan is the same black swan, the appearance of which is expected, but does not expect such a strong impact as it has. That is, this is a well-known event, the outcome of which is difficult to predict.
USDCHF, January 15, 2015, when the very detachment of the franc from the euro took place - pure black swan. Actually, no one expected such a strong reaction of the market, which in particular was the reason for the closure of Alpari UK.
Why are we missing black swans
What is interesting, about many moments, technical failures, in two years they will not even remember. Over time, people lose sight of black swans, underestimating the role of chance in life and in trading.
According to the terminology of Nasim Taleb there is kraynestan and srednestan. Krajnestan is where the curves (returns) form strong fluctuations. Srednestan is what all scientists, observers and ordinary people strive for, that is, to smoother lines and curves.
The rarer the event, the more difficult it is to manage it, and the less we know about how often it happens. Remember, when you test a strategy, as a rule, you do not pay attention to any particular cases. In general, we strive to generalize and simplify everything. In fact, only a handful of major events had a decisive influence on history.
Like folk signs, when a trader sees a new, previously unreceived pattern, he immediately tries to find some pattern and begin to use it in trade. Although in reality there can be no regularity.
In exactly the same way, we can draw conclusions based on data that are not decisive. Also, something complex cannot be understood by looking at its parts separately. The system may be too complex for us to fully understand it, having only well-known facts.
Human consciousness suffers from three problems that Nicholas Taleb calls the Eclipse Triad.
- The first is the illusion of understanding. As a rule, taxi drivers and hairdressers know much more about managing the country than those who are directly involved in this;
- The second is retrospective distortion. That is, when the event has already passed, it is much easier to explain;
- Third, the tendency to exaggerate the significance of the fact.
Thus, in any sphere of life there are extremely dangerous zones that do not look like these, because the risks in them are hidden and delayed. The closest example is the Martingale strategy, when we have a beautiful straight line that can last several years and at one point go below zero.
Forex black swans
What you need to remember is that in the future, the jump in prices of any currency pair can be almost anything. As an example, inflation in Zimbabwe in 2008 amounted to 231% billion. That is, the money turned into paper.
This means that you need to prepare for the worst events in advance, and be prepared for any unexpected situation at any time. At the same time, the black swan, usually a sharp drop, almost always follows a sharp, and then a long-term correction. We can use this moment to our advantage. If everything collapsed, you should stand up to the purchase and hold the position for a couple of weeks. But, after the black swan, some of the pairing strategies stop working for about six months.
Another black swan in forex trading is PAMM accounts with an extremely smooth yield curve. A prime example is the Trustoff account. On this occasion, we have a half-joke article on our website, “How to make money on Forex?”.
Nassim Taleb calls the book Anti-Fragility his main work, as it brought the idea of a black swan to a logical continuation, providing concrete steps to action.
Anti-fragility is not at all like elasticity, flexibility or invulnerability. Anti-fragile, having passed through trials, becomes better than before. This property is possessed by evolution, political systems, technical innovations, a company that survived the crisis, good culinary recipes, a developing city, the resistance of bacteria to antibiotics, cockroaches to poisons. That is, the fragile from changes, shocks and crises is only getting better and, in fact, anti-fragility is a remedy for the black swan.
An example of creating anti-fragility is vaccination. That is, when a small dose of the same strain of flu is administered so that the body gets rid of it and, as a result, immunity increases.
Another example is related to aircraft manufacturing. Now planes crash very rarely, but before that they crashed so many times. That is, work was done on the bugs, improved security systems, autopilot, motors and so on.
Small forest fires, for example, also carry away most of the flammable material from the forest, preventing it from accumulating. That is, a small fire in the forest is normal. When we prevent the occurrence of fires, it seems to us that we make the forest safer, when in fact this is not so.
For the same reasons, stability affects the economy badly. In a period of long prosperity, firms forget what failure is, weaken and become more vulnerable. The lack of fluctuations in the market also dulls attention, as a result of which caution is reduced.
How to make your strategy anti-fragile
How to make your strategy to confront the same black swans? The main thing that you must understand is that everything fragile hates volatility. An anti-fragile system can earn thanks to uncertainty.
Remember one more key - in order to live long, you need not die. That is, in order not to merge, you need to set stop losses and comply with money management. Those very big fluctuations, like Brexit, are called market cleanings and they clear the market of so-called weaklings or extra participants.
Also, when testing a strategy, we pay attention to extreme cases, so that at such moments the strategy, if it doesn’t work, but survives. Therefore, if you are testing your strategy on the franc, the pound, then you need to pay attention to Brexit, and that is January 15th - the strategy should survive. No need to try to tailor the strategy to a specific event, since the next black swan can be unpredictable.
If something becomes larger and more complex, along with it it becomes more fragile. The mouse has more chances to survive than the elephant. The more complex your strategy, the worse it will work. Simple strategies are more durable and less sensitive to market changes, so excessive complexity should be avoided.
Taleb describes the so-called “Barbell” strategy, a method consisting in combining a defensive and adventurous approach. For example, you can put 60% of the deposit into a bank account, and trade the remaining 40%. Thus, if it were your entire trading account, you would risk 2-3%, and so you can risk most of the deposit. As an option, most of the deposit can be traded according to some conservative strategy, and experiment with risky strategies with some small amount.
Ideally, it would be desirable to have such large bursts as a black swan, at least partially catch. To do this, first of all, you need to change the order of use of take profit. Alternatively, it can be a trailing stop or a time exit.
Also, in order not to miss a major movement, it can be morally useful to pause the market. This can be done with the use of locking, positive or negative. Thus, you have time to think whether it is worth continuing to hold a position, or you should close a part, leaving, for example, only sell.
Different strategies - different accounts. This is a rule that I never tire of repeating. Merging different strategies on one account is extremely undesirable. According to the law of meanness, one strategy gives a plus, another minus, and in the end you have no profit. And so you could get most of the money from a profitable strategy.
Observe safety precautions - you need to be prepared for everything. Nevertheless, trying not to lose on uncertainty, but to make money. Banal rule - follow the calendar and news. Knowing what date Brexit or the US election will be will not hurt. And, remember that the answer “I don’t know” to the question “Where will the market go?” Is a perfectly normal answer.