EM FX liquidity drying up in volatility — a hard lesson

One of the harder lessons I learned trading EM FX, specifically in South American pairs, was underestimating just how quickly liquidity can evaporate during a spike in volatility. We're often told about wide bid-ask spreads, but there's a difference between wide and non-existent. I was holding a long position in $BRLUSD heading into a contentious election cycle, confident in my fundamental thesis for post-election recovery. What I didn't fully account for was the extreme risk-off sentiment that took hold on an unexpected election outcome, pushing the market into a complete frenzy.

My mistake wasn't necessarily the initial position, but the naive expectation of being able to exit at a 'reasonable' price even if things went sideways. When the market opened the next day, the gapping and complete lack of depth in the order book meant my stop loss, which was placed at a level that would have been fine in normal conditions, executed at a price significantly worse. The slippage alone wiped out weeks of gains and then some. It taught me to always stress-test stop-loss efficacy in low-liquidity environments, especially with EM assets, and sometimes, no position is the best position when the tail risks are truly fat.