FX: Drawing a line under market movements
Stop-loss orders have proved their worth again in 2018, protecting retail FX traders in particular from increased volatility in emerging market currencies.
Stops are an important risk and trade flow management tool, especially in managing books of smaller FX trades spread across multiple venues and counterparties.
As trading has become more electronic and automated, stop-loss orders have become even more useful and this trend is likely to continue into 2019, especially for market participants with an interest in currencies such as the yuan and the Turkish lira, which are expected to fluctuate significantly next year.
Automation demands better use of stops, particularly in a fragmented, smaller trading size environment, explains Brad Bailey, research director with Celent's capital markets division.
“However, users need to be aware of how exactly they will be filled,” he says. “[Stops] are best used as a tool for managing multiple FX positions, and using them on smaller trades can free up bandwidth for traders to work larger positions.”
It is vital that traders understand how each of their counterparties utilize stops, and the mechanisms that will trigger a stop-loss order. Stop-loss orders in FX are determined by the counterparty or venue that holds the orders.