HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

How not to fall prey to the Black Swan


The black swan is a sudden unpredictable event with enormous consequences - this is a brief description of this term, which became widespread in the media after the crisis of 2008, which was its live example. What this term really means and how to protect our savings from the destructive effect of Mr. Chance will be described in this review.

“Before the discovery of Australia, the inhabitants of the Old World were convinced that all swans were white. Their unshakable confidence was fully confirmed by their experience ... [this example] shows in what rigid boundaries of observation or experience our training takes place and how relative our knowledge is. A single observation can cross out the axiom bred over several millennia, when people admired only white swans. One black bird was enough for its refutation.”

This is how the book “The Black Swan” begins, written by the author of this term, Nassim Nicholas Taleb, an American trader and scientist whose interests are focused on chance and its impact on society, in particular, on world financial markets. The book was published in 2007 shortly before the global financial crisis, which became a living embodiment of the ideas presented in it. Subsequently, many experts will say that they predicted the crisis before it started, but in reality for the vast majority the collapse of the financial system was unexpected and caused serious consequences. The crisis has become a real "black swan" for the global financial system.

“Human nature forces us to come up with explanations for what happened after it happened, making the event, which was initially perceived as a surprise, understandable and predictable,” Taleb explains, pointing out that in reality the vast majority of events in the financial world are unpredictable and exclusively retrospective explanation.


Briefly, the "Black Swan" can be described as follows:

In the financial market, the investor is constantly facing the unknown: geopolitical, economic, market, system, operational, currency risks. Risks of interest rates, liquidity, good faith of the counterparty and the “human factor” - a combination of all these things, often unpredictable due to the complexity of the relationships, makes meeting any investor with their personal “black swan” only a matter of time.

A rather alarming picture is being formed. Despite all the skills, experience and talent of an investor, one random event can cross out the whole result of long efforts to grow capital. How to avoid or at least smooth out losses from such force majeure?

How to protect yourself from a black swan?


In the next book, “Anti-Fragility”, Taleb offers his own version of how to protect yourself from black swans. He calls his decision “barbell strategy”. By analogy with barbell pancakes located on opposite sides of the bar, Taleb offers the investor to place his funds at the opposite ends of the yield / risk curve, avoiding the average values.

As part of the “bar strategy”, most of the funds are allocated in extremely conservative instruments, which can be government bonds, state-insured deposits, cash or long-term tangible assets, such as residential real estate.

The rest of the money is invested in aggressive instruments with a growth potential of hundreds of percent. In other words, a bet is made on the black swan. Most likely, it will be unsuccessful, and the investor will suffer minor losses, which he will compensate by the income from the conservative share of the portfolio. But if the black swan is realized and the bet plays, then the profit will be very substantial.

“If venture capital enterprises flourish, it’s not at all thanks to the stories that have settled in the heads of their owners, but because they are open to unplanned, rare events,” the author of the strategy notes.

Taleb himself during the crisis of 2007-2008 earned at the expense of a bet on a black swan about $ 500 million, 97% of which he received in just one day. During the sharp fall of the S&P 500 index in the fall of 2008, the profit on “Out-of-the-Money” Option (OTM) could reach thousands of percent. Taleb did not know when the crisis would break out, but he was sure of the fragility of the financial system at that time. For two years he bought put options and lost money on them, until one day he became rich. Due to the fact that the risk / profit ratio was about 1: 10000, he was able to implement such a strategy and not go broke ahead of time.

In addition to options, futures, unpopular third-tier stocks, venture projects, active speculative strategies or alternative investment instruments can also be used as a bet on a black swan.

The “barbell strategy" can be used in a variety of ways. For example, 90% of the capital is used for conservative investments in bonds, and the remaining 10% is used for intraday futures trading. Or another example: 85% of the capital is invested in blue-chip shares, and the remaining 15% is invested in own business projects or alternative investment instruments.

The strategy is applicable in the context of personal finance. For example, 70% of all working time a person works for a fixed salary, which allows him to provide himself and his family with the necessary minimum. And he devotes another 20% of his time to his personal projects, for example, trading on the exchange, which could potentially make him rich.

For active traders, the “bar strategy” has a separate application in the form of recommendations for risk management. The profitability of intraday traders is measured in hundreds of percent, but the risks are often equally high. In such circumstances, risk management is of fundamental importance.

It is very important to divide situations when a trader risks his own capital, and when he risks already earned profit. At the beginning of the trading day, the trader should be as conservative as possible: focus as much as possible on the most effective patterns and severely limit losses. Risk can be increased only when profit appears on the account. Increasing rates as profits arrive can provide exponential growth in returns with limited risk of losses.

With this strategy, most of the time the trader will be content with very modest results, avoiding significant risks. And on good days there will be a chance to hit a really big jackpot.

The strategy works at the level of one individual transaction. This concept is well known to traders in the popular expression "quickly cut losses and let profit grow." About 60-70% of transactions turn out to be unprofitable and close with a small loss due to a short stop loss. But the remaining 30% due to the high profit / risk ratio covers the entire loss and provides a positive result. In fact, a single speculative transaction is also a kind of bet on a black swan.

If desired, you can find other successful ways to apply this concept. The main principle here is that in case of the realization of some unpredictable, but probable event, the investor will be in a significant plus, and the rest of the time just do not lose your money. This approach will tame uncertainty and make it work for investor capital, not against it.

Author: Kate Solano, Forex-Ratings.com

RELATED

Bitcoin trading: how to trade bitcoin in 2020?

Bitcoin has become an extremely popular financial tool in the past few years. However, not many people are familiar with the basic concepts of this cryptocurrency...

Everything To Know About a Crypto Bear Market

If you have been trading crypto, you certainly have heard the terms “crypto bear market” and “crypto winter.” Ultimately, this is a situation where the market sells off quite drastically...

Is It The End Of The Cryptocurrency Bull Run?

A recent selloff across the cryptocurrency market has turned greed to fear, and in a flash nearly a trillion in value was wiped out from the market cap of cryptocurrencies...

What Is FUD In Crypto? Why It Can Impact Prices

If you have been around the cryptocurrency market for even a short amount of time, certain words pop up again and again, such as FOMO, FUD, HODL, and more. As of late, the term FUD...

Forex Trading With PAMM Managed Accounts

Ever since the currency exchange realm has opened up to individual investors, it is seen more and more in people's portfolios. However, for most individuals...

Forex vs. Crypto Trading: Navigating the Complexities and Nuances of Two Diverse Markets

In the high-stakes world of trading, investors are constantly evaluating their options. Forex and cryptocurrency trading are two of the most prevalent choices, each presenting its unique set of opportunities and challenges...

Investing in Bitcoin in 2020: Is It a Good Idea?

The one of a kind financial asset has been compared to gold and said to have the potential to unseat the dollar as the global reserve currency one day...

Can you make money with crypto arbitrage?

Crypto arbitrage is the practice of and methodology behind taking advantage of price fluctuations in the price of various cryptocurrencies, such as Bitcoin or Ethereum. These variances...

What Made Bitcoin's Last Bull Market Different?

Bitcoin has experienced multiple bull markets, and this latest one, which began in 2018, is markedly different from the last. Between late 2018 and the time of this writing...

NFTs and Tokenization of the Economy

Non-Fungible Tokens (NFTs) are the new hype in the digital world. These tokens are digital representations of value created using blockchain technology...

What is a Crypto Saving Account? How to Earn Interest on Crypto?

One of the best ways to earn when it comes to financial markets is through this steady return of interest. While most bond and stock traders understand the ability to benefit from interest accounts...

Navigating the Exciting Challenge of Trading Over 150 Stocks with ModMount

ModMount presents traders with the exhilarating opportunity to dive into one of the largest and most dynamic online markets – the stock market. This platform challenges traders, whether novice or seasoned...

Maximizing Financial Gains with USDC: An In-Depth Guide to Earning Interest

In an era where traditional banking yields are diminishing, the allure of earning interest through cryptocurrencies, particularly stablecoins like USD Coin (USDC), has gained immense popularity...

What Is a Limit Order? How Does It Work?

One way that you can protect your account is by using what is referred to as a "limit order". These orders specify the most you are willing to buy or sell a security at

Cardano vs. Ethereum: Which one is the Better Investment?

When comparing Cardano vs. Ethereum, there are many things to consider. Both can be invested in, and quite frankly, both have their uses. However, Cardano and Ethereum...

TOP 10 Effective & Profitable Forex Advisors in 2020

Automated trading systems are an opportunity to create passive earnings in the financial markets for all users. Successful and proven strategies...

Forex Carry Trading: A Comprehensive Guide for 2023

As the echoes of the 2008 financial crisis still resonate, the world is now grappling with a new economic challenge: swift inflation. This inflation surge has brought the carry trade back into the limelight...

Is MetaTrader 4 good for Crypto?

MetaTrader 4 is used to trade a variety of financial instruments including some of the world’s most popular cryptocurrencies. In this blog, we’ll look at the benefits of using MT4 for crypto trading...

Micro Lots and Everything You Need to Know About Lot Sizes

Before any trader jumps into the market and starts trading, it is imperative that they understand the concept of lot sizes. Throughout this article we will explain what a lot is, different lot sizes and how to calculate your various position sizes...

InvestLite: Bitcoin investment explained

Bitcoin is digital money that does not physically exist. However, there are special registers where information is stored about how many bitcoins someone...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.