On February 14, 1994, there was a St Valentines Day Massacre for plenty of traders that were caught wrongly positioned in the currency markets.
Certain floor traders got wiped out. Take a look at the floor trader named Jeff Ansani from the movie Floored Episode 4 on Babelgum. Scroll to the time of 2:00 to start hearing his story.
He had a small position on being short the Japanese yen going into the weekend of February 12th, 1994. The market gaped against him and he was down $40,000 instantly. The market went limit up against his short trade in the futures markets. The market then proceeded to move against him on Monday, February 14th.
He lost everything on one trade. He was short the yen and the market gaped and moved against him on Sunday February 13, 1994. The market then moved further against him on Monday, February 14, 1994. He lost $150,000 and was wiped out.
The way this played out in the forex spot market can be shown in the action of USD/JPY.
The above is a daily chart of USD/JPY during 1993-1994. The market dropped 150 pips on Friday, February 11. The market then gaped down on Sunday and continued dropping by 550 pips on Monday, February 14. Floor traders stuck on the wrong side of the yen got annihilated. Spot traders who were long USD/JPY also took losses.
The reason it was dubbed the St Valentines Day Massacre is because George Soros also lost big on that day.
Soros also lost a ton of money within two days. Soros lost a total of $600 million in the markets. He had a long position in USD/JPY of at least $8 billion dollars. The market in USD/JPY moved over 5% against that position, so he lost over $500 million dollars. The employees inside his Quantum hedge fund dubbed it the St Valentines Day Massacre.
A lot of floor traders, as well as some big money managers were caught on the wrong side of that move. Of course someone provided liquidity to them and pocketed handsome profits during that time period as well.
There are always trading lessons during these types of events. They have to do with expectations analysis. Huge moves don’t happen because of moving averages, stochastics, divergence, chart patterns, forex robots. They cannot generate sufficient order flow to move the market that much. They cannot cause markets to gap.
Enter expectations analysis.
Soros, and some other macro hedge funds were playing USD/JPY on the long side. USD/JPY looked to be forming a bottom in the middle of 1993 and was pushing higher. It even formed a head and shoulders bottom and triggered the pattern!
Soros thought that the USD/JPY move lower prior to February 14, 1994 was temporary. He thought the move was temporary because the U.S. government was attempting to pressure the Japanese in trade negotiations by encouraging a stronger yen. He thought the U.S. government was just doing it on a temporary basis and not based in global macro reality. Because if a currency strengthens too much, then the Japanese exports get hurt in the world markets as they become expensive. The U.S. was using the stronger yen as a form of leverage in the trade negotiations.
And Japan is a very export reliant economy. They do not like a strong yen. Which is why they like to intervene in current year 2011.
Thus, Soros was betting that the two countries would settle their trade dispute, and the U.S. government would then abandon its calls and pressure for a stronger yen. That would cause USD/JPY to go up according to the global macro outlook that Soros had.
Soros had certain expectations attached to his huge $8 Billion + USD/JPY long trade. He wasn’t the only one that bet like that as there were other people positioned similarly.
Once those expectations of a trade settlement were not reached, and the trade talks broke down over the weekend, USD/JPY gaped lower. The bids in USD/JPY were very thin as no one wants to be on the other side of a stop cascade, or global macro move, or elephant about to dump their position. Anyone who was expecting a different outcome was forced to trim their positions or dump them altogether. Their expectations were unfulfilled.
Hence the huge 550 pip move on St Valentines Day in 1994.
If there were any chartists that were betting on the Head and shoulders pattern holding and USD/JPY rising higher, well they had their stop losses underneath 107.50 and 105.50. All of those stop losses were triggered and they took losses as well.
Unfulfilled expectations can be one of the most powerful order flow generators.
If you haven’t checked out the other cool interview from the Movie Floored, then check out the wisdom that former floor trader Greg Riba can give you.
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