Price Shocks

那拉提空中大草原

(奇摩原貼：2010/03/03)

Cite the "Smarter Trading", by Perry Kaufman.

A price shock can be seen as a large opening gap, or a very volatile trading range, often 3 or 4 times the average size, sometimes bigger by a factor of 10. Some analysts will make up special rules to be applied for specific past events; others will include shocks as a part of the normal price phenomena, to be resolved by strategy testing.

If you assume that you could have profited from a large price shock, you have mistakenly reduced your assessment of market risk. You can eliminate a price shock from a chart analysis or computer test, but you can not remove it from real trading. A price shock is not predictable. That means you cannot assume that you would have profited from the price move, nor do you have to say that all price shocks would have caused losses. You can assume that half the shocks will be in your favor, and the other half will be against you.

It would be comforting to place the stop in advance and expect that execution price, but an occasional shock is nasty, and a stop-loss rarely improves risk control.

Guidelines for Assessing Risk

  . More test data gives more realistic results

  . Use less data for parameter selection and more data for risk evaluation

  . Find a worse case scenario in past prices

Qualifying the Shock

There is a logical, accepted strategy to managing a price shock even without computerized testing.

You must qualify the situation. If the price shock was caused by a fundamental, structural change (ex: interest rate), then only a small reversal should be expected. Opportunities for recovering losses from a structural change are small.

Price shocks that cannot be confirmed or cannot be translated clearly into a price change (ex: political news, natural disasters...) are likely to move too far, too fast. These moves allow traders to recover a substantial part of their losses.