This is another take on “cost of trade” and accociated risks
Economic News
Today I sold GBPUSD, which is not an unusual thing to do. However, I did not check the calendar, and it turned out there was an interest rate decision.
To prevent a major disaster, I hedged the position.
It’s nothing dramatic, just my way to protect myself without exiting the position.
The event caused a large swing, which would have resulted in either getting stopped out or experiencing massive drawdowns.
Variable Spread
However, because of something called a variable spread, a stopout during an event like this will not only take you out at your stop but also significantly increase your loss due to the spread at that time.
keep in mind:
you Buying at Bid and Selling at Ask, when you “close” a 1Lot Buy trade, that just means you are Selling 1Lot and this sell will be filled at Ask.
The stop/hedge level was just 6 pips away when I entered the position, but the spread during the event briefly reached 4.5 pips. In the worst-case scenario, the stopout would occur at -10.5 pips, plus slippage.
Let’s just round it up to -12 pips. This would mean that getting stopped out during an event like this could have cost you DOUBLE! This is one of the reasons why risking 1% intraday is unwise, as this position would have cost you 2% if you are lucky and possibly 3% if you are dealing with a shitty broker.
here is a good example of how those things do play out, i hedged GBPUSD twice today [details here]
the trades made me a tiny profit (was not planned), it just happen, BUT the cost of this trades where significantly.
the total possition loss was about 11% with the gain of 16% yet the overall PnL resulting of it is barely 0.4% as the rest of the profits went straight into paying for fees.
to keep track of things i will use the tag 50€
