Unexpected events in financial markets is referred to as ‘Six sigma’ or ‘six standard deviation’ events. A huge fall or a sudden rise, which is anything that is not ordinary. In historical terms, six sigma events are those which makes the market to drop down in red more than 9.5% a day. Theoretically a six sigma event happens once in 796 years, but not in practical.
Historical sigma events:
The above chart shows the major six sigma event that happened in May 17,2004. CNX Nifty tanks around 12% in a day.
Here are the list of major six sigma events.
1. On October 13,2008 the S&P 500 surged upward with 11.82 sigma event and the largest negative sigma event was the October 19,1987 fall with 20.98 sigma event.
2. Indian markets faced the six sigma event on May 17,2004 when the index Sensex dropped by 11% in a single day, when the BJP government is replaced by UPA as the central government.
3. On 16th October, 2007, the Securities & Exchange Board of India (SEBI) came up with proposals to put curbs on participatory notes. The following day when the markets opened the Sensex crashed by 1744 points a minute of opening trade.
4. 2009 Election Results brought two upper circuits post UPA won the elections. National Stock Exchange’s Nifty was locked at 4308.05, up 636.40 points or 17.33 per cent.
5. Financial crisis ,2008 in U.S. market
6. Germany’s ZEW index has plunged from 27.1 to 8.6 in July 2012 during the European sovereign debt crisis.
7. In 2011 Japan’s GDP dropped by 1.7% after the tsunami and nuclear disaster.
8. The plunge and rebound in Indian stocks that pushed the S&P CNX Nifty Index down 16 percent in eight seconds underscored concern about financial markets.
9. 58-Sigma Collapse Of Euro Against Swiss Franc on jan 2015. The Swiss franc has exploded against all currencies up 13% against the dollar and down 25% intraday.
10. Unitech fell over 50 per cent to an intraday low of Rs 6.50 on 3rd June 2015 (more stocks made a intraday crash of 50%. Do name in the comment section if you are able to recollect)
Six Sigma events in financial markets are unpredictable most of the the times. One should learn from the past six sigma events to understand that such events are always possible in the future though the probability of occurrence is very less. Such events are always a threat to one’s trading/investing career especially if you are mean reversion trader or a shorter timeframe trader.
Even the long term investors are not insulated from such six sigma events and traders who are overleveraged are the instant sufferers where most of the capital will be wiped out in one such six sigma event. Make sure you had taken enough protections or enough capital allocation to avoid sudden bankruptcy in your trading account.