Plan Ahead For Fast Moving Markets

Posted in: Basic Trading Strategies, Trading Article

DOWNLOAD THIS POST AS A PDF - CLICK HERE -

Fortunes can be made and lost on any given day and in any given time frame.  No market is immune to rapid movements in price and that includes Bitcoin and cryptocurrency trading.

Unexpected news, surprising comments from key people or way out of line economic data can all catch the markets off guard and stir up lots of volatility.  We see rapid price movements in Forex when a release such as non-farm payroll is out of line with expectations which is why “news trading” is a popular search term.

Bitcoin
15 Minute Bitcoin Chart – Large Moves

You might not have seen it with your own eyes, but I assure you that when markets start flying there will be regular day traders who make or lose six figures in a single day. There will be some who double their $50k capital and some who blow up another $10k account.

Whilst these types of events tend not to occur with any degree of predictability, you can be sure that another one is always just around the corner.

We often talk about the need for having a trading plan and although we can never know when these events will come, we should have a plan in place to either mitigate our losses or to maximize the gift of fast profit.

 

How Do You Deal With These Price Events?

The issue at hand is that some traders do not have any sort of plan to deal with these special conditions when they do arise. As much as resolving to not trade when the market is moving rapidly is some sort of plan, it’s really not enough.

Not taking a trade does at least protect you from possible moves against your position, but what if you’re already in a trade? This will happen to you at some point and you’re going to have to be able to accept your losses quickly else risk watching your trading profits be pulled back into the market.

But then there’s the lure of the opportunity to make a windfall on one or two big trades and this can be hard to resist.  This is why traders watch for the important news release and attempt to trade the reaction to the news.

People see the movement and naturally get excited by it, but it makes no sense when you think about it.

If you wanted to trade something with bigger moves, take a look at trading crude oil or the DAX . If you are trading something which you’re happy with the size of moves it has normally, there’s an argument for trading smaller in times of elevated volatility, in order to normalize risk.

This is the first part which people often forget to address in dealing with risk events.

Then there’s the not uncommon “technicals amnesia” which can play havoc with the trades you take even if they are good in principle.

 

Stick To Technical Trading To Enter And Exit

There can be such an imperative to get on the train – to not miss the trade of the year – that the idea of getting in and out based on how the chart looks technically and market reference points, is completely forgotten. That is until the market temporarily stabilizes a little in order for everyone to take digest what’s just happened; then you realize just how vulnerable the trade is.

The markets often will take out these weak positions in gaining more fuel for the next move. But it can be difficult to sit there and watch a big move because you missed your spot to get in. All I can say to this is that you don’t know what the market will do before you take the next trade and so you must account for what it could do.

Taking trades based on pre-planned conditions allows you to control your level of risk.

 

2 Options For When Big Things Happen

Before you think of taking any action, ensure you are coming from a place of professionalism.  It is the newbie, the undisciplined, and the failed trader who reacts to anything with emotion.

Get On Board The Initial Move

But if you missed the headline or even just hesitated for a moment, the market could be well into the move increasing the likelihood of some type of reversion of price.  This can be a big issue. You either then “sit on your hands” and do nothing or you chase the market down or you hope for a pullback.

If the move is genuinely powerful, you won’t be likely to get a decent pullback until a big chunk of it is over with.  If you keep chasing the market, when you do finally get your fill, it might be just when competition for prices has dropped; just when a reversal of some kind is imminent.

Fade The Move

The second option is to fade it and buy lower prices when you think it’s moved far enough. But how far is the market likely to go before turning? In the event of unexpected news  precisely how long will it be before a denial is made?

  • What if there’s no denial and it just keeps going lower?
  • Do you wait for a denial to come out in order to trade the “counter news” move?
  • How quickly can you then get your trade on?
  • Can you even get a half decent price?

In both of these cases, the arch-nemesis of the day trader is lag. Let me explain:

If you have a half second delay on your price feed for example, normally this might not be a huge problem. However, if a market goes crazy it might move 5, 10, 20 ticks or more in that half second. What’s more is that the added activity could momentarily flood servers with activity, exacerbating the issue.

When the markets are moving wildly, latency isn’t just a potential issue for the retail trader. I’ll give you that the retail trader will almost certainly be affected at these times, but it is possible that it can happen to guys with a direct line into the exchange.

If it does happen it can be devastating; it happens at the very worst time.

Let’s say for example that you are short the market after seeing the initial headlines and you hear the news get denied by officials. You hit out at market, but you don’t get your fill because the market isn’t really where it looks like it is due to lag.

Now your market order is a limit order far from where the current bid is.

On the other hand you could have specifically hit a market order and that means you could literally get any price. Slippage becomes your worst enemy. A fantastic gift from the trading gods becomes your worst nightmare.

 

This Is Some Traders Entire Trading Plan 

Some traders thrive on events like these. They are waiting for them; they have planned exactly how to trade them; their news and hardware setups are geared to speed.

But for many traders the reality is quite different. The reality is that although they could make money here and there, when big news sends the market into a spin their risk is elevated for a variety of reasons. If you have a plan for how to deal with these situations when they do occur (and they will occur), you can mitigate the risk and potentially profit from them.

When the market is moving in a manner that poses huge risk and many traders are losing their discipline, be sure to keep yours.

indicator blueprint

 

The following two tabs change content below.

NetPicks

× Comments are closed.