How To Lose 330 Pips In Less Than 10 Minutes

To get out of my euro/yen trade, I sent a market order to sell out. That's about the worst way you can close out a loser. I got flash-crashed. I tried multiple limit orders to get out, but to no avail. All the metaphorical terms I'd like to use to describe what happened to my trade, such as meltdown or tsunami,  have already been taken by those to whom it applies more urgently. No, I was simply impaled.

Here was my "quote" -- thinking. The euro/yen pair had entered a bullish trend on the dailies and I put macro aside for the moment for a simple swing trade scalp, thinking it was worth about 100 pips. This trade was placed prior to the Japanese earthquake. After the initial reports of the disaster became assimilated, the yen rallied. Hmmm, that's weird. You'd think a natural disaster would decrease a country's currency. I shrugged off the macro, refusing to probe this anomalous (in my mind) reaction. No, technically we're still good. Several days later, I couldn't take the pain and exited my long position for a 300+ pip loss. Now the nuclear meltdown was becoming front-and-center, and the yen continued a confounded rally. Turns out that my exit, although painful, was justified as the pair continued to plummet another 100 pips. That's how you lose 300+ pips in five days. Now the quicker method.

I was seduced by the siren of oversold. I listened to that nasty whisperer, who raised an ephemeral notion in my mind that maybe it was time to get back in, at a better price. Okay, but this time I'll be picky. I placed a limit order about 40 pips below the market. It may take a few hours to get filled, but I've got all day and night. I was filled in about 5 minutes. Hmm, I thought. That's weird. I looked at the price chart and noticed I was immediately in a 20 pip loser. Wow, I guess that's alright. I saved 40 pips.

Ten minutes later, I was reading confirmation codes with my CO about sending the ultimate exit -- the market order. But in the intervening minutes, I watched a stunning display. In the end, of course it was painful. With that loser, I've given back all my forex gains from last year.  I'm not interested in ignoring that. But I'm also more focused on something else. What can make a market move so fast and far in such a short time frame?

This was not the mysterious and eponymous flash crash that we all know and love. This was sudden and awesome,  but the move didn't come from nowhere. This is what, day three or four of the earthquake and aftermath?

Psychology (the mass hysteria type) and macro trump technical. Yes, at times the only thing moving markets are technicals, but once psychology and macro start participating, it's game over.

I should know better but I obviously don't. It is perilous to trade during times when the majority of market participants are confused about what's going on. You simply do not know what they're going to do, because they don't know.

I'm not going to conclude that you should never trade during these times, but do so with the knowledge that you can lose a substantial sum of your capital in a very short time frame. If you're like me and need to get hit over the head before you accept an obvious fact, then it may be worth the price. If you can learn from others, don't bother. But seriously, nobody really learns from watching others.