Last night prior to the opening of the Asian session, the British Pound flash crash occurred. On the GBPUSD, price fell over 800 pips. On the GBPJPY, price fell over 600 pips. While I cannot imagine anyone being long, according to the forex forums, a lot of traders were. In fact, the pip spread (cost of entering or exiting a trade) went up to 150 pips or $1500 to enter or exit a trade.
British Pound Flash Crash
A flash crash is when an instrument suddenly moves dramatically for no reason. In this case, the cause is being attributed to the French President making a statement regarding the Brexit negotiations or to a large position being sold during a period of light volume trading or even a mistaken trade. However, one thing is for certain — flash crashes are happening more in today’s markets. Bloomberg lists the following recent flash crashes:
- May 6, 2010 – Dow Jones
- October 15, 2014 – US Treasuries
- August 24, 2015 – US Stocks and Dow Jones
- August 25, 2015 – New Zealand Dollar
- January 11, 2016 – South African Rand
- May 31, 2016 – China Index Futures
Most of the flash crashes have been attributed to either robot trading or fat finger trades but the British Pound flash crash isn’t. However, it highlights the exposure that futures and forex traders have in today’s market environment. It also highlights the reason that I recommend trading the binary options with Nadex because they provide a way to protect a trader’s account while still making money if the trade goes in the trader’s direction.
For example, the TradersHelpDesk Trend ATR clearly showed only entries to the downside (red dots on the chart below) and the volume was clearly diverging at the ATR (white line on volume). The trades were also highlighted on the binary signals. However, protecting one’s account is paramount to any signal or trade setup.
In this example, traders trading the British Pound flash crash, limit their risk to under $50 per contact and they cannot lose more than the $50 they paid on entry (or lower if using the OTM binary options). While the price did move in the trader’s direction in this example, it could have just as easily moved against the trader. Plus, traders did not have to worry over the increased pip spread cost for entering or exiting the trade. The cost of trading binary options is the same regardless – $1.90 per contract if trading less than ten contracts or $18 if trading more than ten contracts.