Right and if you want a real life example of this played out and documented as it happened read neke's series of journals for the past 5 or six years. http://www.elitetrader.com/vb/showthread.php?s=&threadid=234860
Some people could probably made a huge fortune on 1987 Black Monday event. Remembering the 2010 May 6 flash crash, most people might lost money, but a small percentage traders made a huge profits on that day, that is called edge. An edge is an individual skill to read the market and take advantage of any market situations by L or S, no matter it is 1 SD or 18 SD.
You are actually asking a $1M question.Essentially,your speaking about the so called swans.There are several realisations i`ve come to,to help to avoid the swans issue and to keep an edge. They are as follows: 1.Capitalization; 2.Using stops outside 3 SD; 3.Avoidance of the opening and closure,holidays,news releases,etc; 4.Setting up the targets equal to 3 SD; 5.Reducing trading frequency,commisions. Buy taking these steps,it seems possible to keep an edge over the long haul.
Specifically #2 would ensure you of huge losses on black monday oct 19 1987. Back then the computers couldn't keep up with the volume of transactions and price was essentially unknown just like in 1929. Nowadays with faster computers & the trading halts in place it's less likely the system will be overloaded by volume but it's not at all certain that trading halts won't make the selling situation worse.