WHEN NOT TO TRADE - WEEKEND GAPS
One very important piece of information that you must know and find out
, is whether your fund manager leaves positions open over the weekend.Let me explain what potentially could happen. Gaps in the market can occur when unexpected bad news enters the market. Any good trader will have a stop loss in place. A stop loss it used to avoid catastrophic loss. When a trader opens a position he will have a target in mind and he will also have a strategy in case things don't go to plan and price goes against him by a certain amount of pips. Every incremental movement on a chart is measured in what's called pips.
An experienced trader will not normally risk more than 1%-2% on any one trade. So he will set his stop loss in a place that if taken out, the maximum he would risk would be that amount. So should the worse happen he only would lose a maximum of 1-2% of his account balance.
In normal circumstance when price goes in the wrong direction the stop loss will be triggered and you would lose the trade and whatever the maximum risk the trader had decided to take.
If he kept losing trades eventually the forex broker would give the trader a margin call or automatically close him down when there is not enough funds in his account to trade. But he would never lose more than what is in his account in the worse case scenario. But what many people don't understand is that it is possible to lose more than what is in your account in very rare circumstances, if your trader holds positions over the weekend.
On a weekend the markets are closed until sunday night when Tokyo opens. If there is unexpected bad news for example the collapse of a bank the market will gap on opening of the market. A gap means the market jumps many hundreds of pips as the market re-opens and it will miss the traders stop loss completely. Although this is extremely rare, it can happen and you could be liable to owing the forex broker money even though your account has been blown!!! So you need to know this and make sure your fund manager never holds a position over a weekend and if he does he must hedge the position.
This is why almost all of our trading strategies only trade on monday through thursday for this reason and the one strategy that leaves positions open over the weekend is properly hedged to avoid any possibility of a catastrophic loss. So the message is find out how your fund manager trades or face the possibility of losing more than whats in your account!
WHEN NOT TO TRADE - WEEKEND GAPS
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