Flash crashes and the mechanics behind them

[Amanhasnoname]

Occasionally, a pair drops hundreds of pips in seconds and then recovers almost completely. Examples include the October 2016 sterling plunge and the January 2019 yen spike in thin Asian hours.

The mechanics tend to repeat. Liquidity is thin, perhaps after a holiday or during the quiet period after rollover. A large order or algorithmic selling meets a book with few bids. Price gaps down through levels, triggering stops, which feed more selling. Liquidity providers pull quotes, so the gap widens.

Stops get filled at the worst possible prices. Margin calls fire on accounts caught in the move. Some brokers cancel trades afterward, others do not.

The lesson for scalpers is mostly defensive. Avoid heavy exposure during the thinnest hours, especially on crosses and in holiday periods. Keep leverage moderate. Know the broker's policy on cancelling trades after extreme events.

It is also worth remembering that the recovery is not a guarantee. Positions closed at the bottom stay closed.

Has anyone been caught in a flash move, and what changed afterward?