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What is a Black Swan Event?

By Louis Holding-Parsons on June 12, 2019

5 (100%) 1 vote[s]

In markets there are terms which when seen mean nothing at all! A black swan event is such an example. Yet these are terms that every trader should know and understand. They often denote a random kind event, usually negative. Learning these terms won’t necessarily make you a better retail Forex trader, but they will give you a greater breadth of knowledge. 

Bird watching gone mad!?

A black swan event is not associated with birdwatchingA black swan event is one which is impossible to predict and is negative. So strong is this kind of event, because of the financial losses which usually follow, that the market has given a name to it! Whereas white swans are seen as a paragon of beauty and virtue, black swans are generally viewed as being evil. This mythical view gives sense as to how the black swan event came to be used to describe a big negative financial event.

When a black swan has appeared

A black swan event is not easily definedThere is no accepted way of defining a black swan event, it is an interpretation. Forex market participants will come to an agreement that an event was a black swan because it was so unexpected and will cost them so much. Yet this is a simplistic view. Markets are risky by their very nature. There are so many variables involved that it is impossible to predict how they will behave in the future. Just try and predict central bank monetary policies! Although we live in a time where central banks seemingly go out of their way to tell us what they are planning it was not always so. Forward guidance might be the rage today, (or a version of it) but this was not always the case.

Donald Trump elected president

President Trump's election could of been considered a black swan eventA recent black swan event was the election of Donald Trump to be elected President of the United States. Cast your mind back before the result was announced, Hilary Clinton was expected to win. Indeed many were willing her to win as Trump was seen as an outsider with ideas which were at odds with the political leaning of our time. When it became apparent that he could win, the geopolitical risk he was thought to represent drove world markets, such as the S&P500, lower. Yet soon there was a realisation that his corporate friendly policies, such as the reduction of corporate tax, would be ideal. What had seemed like a black swan event has actually turned positive: the S&P500 recovered and at the time of writing has continued to push higher.

How can I reduce the impact of a black swan event?

The unpredictability of this event means there is no road map to deal with it. Yet there are certain ways which can help reduce the impact. A good risk management approach to your Forex trading can help. Taking steps to limit your exposure to any one position by only risk 1/2% per trade of your portfolio, is a wise move. Having a risk-based approach where your focus is not losing money, should help you avoiding blowing up your account.

Conclusion

There is no singular way of avoiding a black swan event. By their very nature they are unpredictable, random and for those unprepared, painful. Any retail Forex trader should be prepared for the worst, whilst being flexible to take advantage of opportunities. Diversification and limiting the size of each Forex position, gives you the best chance of limiting the impact of a black swan event.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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