A Trading Diary of Black Monday

First name: Mateusz
Country of residence: Poland
Years of trading experience: 36 years
The platform/products you were using: easy-forex web trading.

Although many traders were expecting volatility in the global financial markets after the Chinese central bank devalued the yuan on August 11, nobody anticipated what would happen less than two weeks later. August 24, 2015 will forever be remembered as Black Monday, the day the global markets plunged into chaos.

To put it in perspective, a trillion dollars were wiped from global stock exchanges on Monday. The domino effect began in China and ended in New York, creating a vicious cycle that would shave additional trillions in the following two days, forcing the People’s Bank of China to cut interest rates yet again and pump an additional 140 billion yuan into the country’s financial system.

As a Polish trader, I had no idea what was happening in Asia until I opened my Facebook page at around 8:30 am EST on Monday. Apparently there was a meltdown in China, with the Shanghai Composite Index plunging 8.5%, its biggest one-day drop since 2007. (It would plunge another 7.6% the very next day.) I quickly opened my economic calendar to see if there was an event I had missed. The calendar was clear – in fact, more tame than normal – and nothing of interest was released over the weekend. The only possible explanation for Black Monday in my mind was dwindling investor confidence, mostly as a result of weaker growth prospects in China. And with China’s economy expected to slow even further, I knew that I was in for a bumpy ride.

Feeling scattered on a Monday morning definitely isn’t the way you want to start your trading week. With European markets also plunging 5%, I knew Wall Street and the Toronto Stock Exchange were next. Looking at my portfolio, I felt pretty safe because I had previously unloaded my individual stocks and opted for indices (don’t forget that the Asian markets had been plunging for a few months prior to Black Monday). I knew the major averages – the Dow Jones, S&P 500, Nasdaq and TSX – would take a hit, but what can I do at this point? I stayed positive and thought to myself, if the markets plunge, I will use it as an opportunity to dollar-cost average. After all, I own the market; if it falls, I will have the opportunity to buy at a discount.

The slump was far bigger than I thought possible. The Dow Jones Industrial Average posted its first back-to-back 500-point loss on record and experienced its biggest midday swing in history the day after Black Monday. After the dust settled, the major US indices had entered correction territory, extending their losing streak to six days – a loss that would amount to $2.1 trillion on Wall Street! I didn’t unload my indices. In fact I bought more the day after Black Monday. Given the way the market has behaved over the past few sessions, I stand behind that decision.
The currency market is where I got burned really badly. Traders seem to forget just how fast the dollar plunged on Black Monday. They look back on it now and see a 1.7% loss for the dollar index, failing to realize it was down by around 4% in midday trade. I was long on the USD/JPY and USD/CAD and short on EUR/USD. To put it mildly, my account was virtually wiped out – the USD/JPY suffered its biggest loss since 1998 and the EUR/USD surged to an 8-month high. The USD/CAD was my only good position (despite the sharp fall in USD, the commodity-driven CAD plunged to 11-year lows).

With the dollar in freefall, I went long on gold futures, thinking the two would trade inversely with one another, as they so often do. I was really banking on gold pushing $1,100 an ounce. After all, it had closed just below $1,060 the previous week. Gold performed OK on Black Monday, but plunged $30 over the next two days. I set up trade alerts to monitor the position, thinking I would take-profit at around $1,070. Suffice it to say, the trade got me absolutely nowhere. The misstep reminded me why I vowed to put off gold until it fell below $1,000 an ounce. The market has just been too volatile, too bearish for me to approach with a clear mind.

I had no real reason to believe gold would surge after Black Monday other than its safe-haven appeal, as well as its performance over the previous week. With all these offshore vaulting facilities opening up, maybe risk-averse investors are putting all their money into physical gold instead of futures contracts. That always seemed a little extreme to me, but after Black Monday, doesn’t seem like a half-bad idea.

Looking back at my Black Monday trades – indices, currencies and gold – I obviously lost more money than I made. Perhaps more concerning, at least in my mind, is the market’s propensity for extreme volatility. I’ve always been risk-averse, but Black Monday made me more so. The markets did things I’ve never seen before, and I’ve been trading since the 2008 financial crisis.

With weakness in Europe, Canada, Australia, Japan and now China, where will yield-seeking investors now turn? The age of superlative Chinese growth appears to be over, and investors know it. Around $5 trillion has been wiped from global equities since the devaluation of the yuan in mid-August and more losses may be at stake. It looks like the global financial markets may be in store for many more Black Mondays in the short-term, as a growing number of analysts are foretelling a major financial crisis in 2016. Black Monday was certainly a nod in that direction.

These are trader’s personal recommendations and/or strategies. This is not financial advice or a recommendation by easy-forex or advertisement for other products owned by third parties.

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