Brazil’s plunge and what can we learn from it?

This week I would like to write about Brazil and it’s stock market. Most of you are probably aware, that the market opened with a nasty gap down of around -17% on Thursday the 18th of May. I was long EWZ, Brazilian ETF and of course I was down on this position that day. I decided to close my position with no hesitation. Let me write about this position and what can one learn from it. 

The move on Thursday was one of the top 5 biggest moves in the last 20 years. 4 of them happened in ’01 and ’08 and one was this Thursday.

Before start talking about reasons to open and close the position I’d like to note that I trade based on chart patterns and trading systems. Therefore I open or close my positions when charts/the system tell me to open or close a position. I look at fundamentals and even though maybe some macro guys or investors were thanking the market for a great discount in Brazil, but I don’t trade that way.

Let me explain what was the reason for opening the position in the first place, closing the position in the second and more importantly what was the lesson one can learn from it.

On May 1st I tweeted that EWZ is breaking out of its corrective wedge formation. This is when I entered the long position. I also wrote about emerging markets and Brazil last Sunday, so I invite an interested reader to go give it a read. The market was in a clear up trend also the dollar was weakening so this was a no brainer to me.

The position started performing well more or less straight away and after few days I started seeing a nice PnL numbers. But then, this Thursday… the market opened down at around -17%, down more than 25% from it’s most recent peak. ewz

Thankfully to a good risk management (in this case position sizing) I didn’t lose an amount which I couldn’t afford. Sure, the loss was bigger than it would have been had the market not gapped down so much or in other words the loss was meaningful but it was limited and by no means catastrophic! I wrote a post that money management is crucial in trading [see here], I stand by this statement and this kind of events are just emphasising the statement.

Could I have known that the market could gap down so much? Of course not.. and I doubt any one could have known. But would I trade this setup again? In a heart beat!

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