Every FX trader knows the pain. You’ve done your homework, studied the charts, checked the forex news – everything looks good. And you’ve put a protective stop on your trade, just in case.
But sometimes, the unexpected happens – like a flash crash, volatility at the market open or wild swings around a Fed announcement. Spreads widen dramatically and your stop order is triggered. When the market recovers moments later, it’s too late – you’ve been stopped out.
If that’s happened to you too many times, you might want to take a closer look at the way your broker executes your orders – especially the way stops and close-outs are triggered. How your broker pulls the trigger for you could have a major impact on your bottom line.
Next stop, volatility
Today, many brokers – including those offering the MT4/MT5 platforms – execute FX stop orders by triggering them on the leading side of the spread – so if you’re long and set a stop to sell, your stop will trigger on the bid price; and when you’re short, your stop will trigger on the ask price.
In orderly markets, that’s all well and good. But when volatility hits – and it will – this trigger method can have some pretty painful consequences. In volatile FX trading, bids can disappear quickly as buyers pull their orders – and when stops are triggered on the bid and executed at the next available price, market moves can become exaggerated, spreads can widen and you could find yourself stopped out too soon, at a very unfavourable price.
Stop safely
To avoid those “too-soon” stop-outs during market volatility, you need stops that keep you in the market longer. That’s why, at Saxo, we trigger your forex stops on the opposite side of the spread – that is, the trailing side. So, if you’re long, your sell stop will trigger on the offer price – and you won’t be stopped out so easily by those whipsawing bids.
And for even more protection, we trigger all stops based on a neutral price from a primary inter-bank venue – this ECN feed is wider than our own bid/offer spread, it’s less prone to sudden moves and provides a much broader, more consistently present set of liquidity.
To see how this can keep your FX positions safer, consider this scenario: You’ve done your analysis, entered a long forex position at 1.20 and put in a stop order to sell at 1.14, should your trade go the wrong way. Then, out of nowhere, volatility hits – the price moves lower, then recovers to trade at a higher level:
But check out the solid yellow line – that’s the ECN feed we use. And since Saxo’s stops are triggered on the trailing side of the spread at the ECN offer price, your stop (yellow arrow) remains untriggered through that price move down. Your position is safe and when the price recovers, you’re set to take profit, exactly as planned.
Now, we will note that this trigger method means that stop orders overall won’t be executed precisely at your specified level since the primary inter-bank venue’s offer price will always touch that level later than our own offer price. We believe that, just like any insurance policy, it’s a price worth paying for having more protection when you really need it.
If you’d like to read more about our order execution policy, you’ll find it here.
Stayin’ alive
Margin close-outs are the ultimate stop-out, and the only one you have no control of. Simply put, if your margin utilisation reaches 100% at any time, a close-out will be triggered and your positions closed out automatically.
While close-outs do guard against larger trading losses, they can also be triggered too soon during periods of short-term volatility, whether caused by economic news or reduced liquidity during a value date rollover or the market’s open and close.
To ensure that you stay in the market longer, we calculate the value of unrealised profit/loss on your FX spot and forward positions using the opposite side of the spread. So, a net long position is valued on the offer price rather than the bid price – and vice versa for a net short position, which we value on the bid price rather than the offer.
Let’s say EURUSD is trading at 1.19/1.20. You have USD 10,000 in your account and open a USD 120,000 position. The margin requirement for this trade is USD 1,195 (USD 120,000 x 1.0%) and your margin utilisation at this point is 12% (USD 1,200 / USD 10,000).
Later, the market moves and EURUSD is bid at 1.11 and offered at 1.12. The spread might be small, but whether your unrealised profit/loss is valued on the bid or on the opposite side can make a world of difference to your trading.
Take a look:
If valued on the bid price, you have an unrealised loss of USD 9,000. That means your margin utilisation has risen to 112%, calculated as USD 1,115 / USD 1,000 (USD 10,000 – 9,000). And since that puts you over the 100% margin use threshold, you’d be closed out.
But at Saxo, that won’t happen – since we calculate unrealised profit/loss on the offer price, you’d only have an unrealised loss of USD 8,000 in this scenario. Crucially, this means your margin utilisation would have only risen to 56%: USD 1,115 / USD 2,000 (USD 10,000 – 8,000). No close-out.
Keeping traders safe
At Saxo, we don’t offer the high levels of leverage that some global brokers do – and for good reason. We know that high levels of leverage combined with automated margin close-outs can create a toxic cocktail of frequent “too-soon” stop-outs, even in normal market conditions. In fact, with 400:1 leverage, there’s a 75% greater chance you’ll encounter a price move that’s more than or equal to your margin requirement.
Like our FX order execution methods, our responsible levels of leverage may be hidden behind the scenes but they play an important role in reducing stop-outs and margin close-outs. And the results? According to our Enhanced Disclosure, in the past 12 months only 0.3%* of Saxo client trades, on margin products, occurred due to forced automatic margin stop-outs or execution of mandatory trade related stop-loss orders. Furthermore, the average tenure of our client base is more than four years, which is an indication of our ability to foster a client base that is profitable, or otherwise satisfied with their performance.
*correct on November 15th, 2017
The #1 choice for FX traders
Yes, we’ve won multiple FX awards from the likes of Finance Magnates and FX Week. But the real reason so many FX traders choose us is that we’re committed to helping you succeed. That’s why we focus on quality execution, with Tier-1 liquidity that gives you higher fill rates, fewer premature stop-outs and significant price improvements.
We offer:
• Ultra-competitive FX spreads starting at just 0.4 pips on majors
• 182 FX spot pairs and 44 FX vanilla options
• Powerful FX trading tools in our award-winning platform
• 24-hour service in your local language
So, the next time you’re stopped out too early, that could be your trigger to join 800,000 Saxo clients worldwide and trade safer, longer.
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
– Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
– Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
– Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)
