This Week’s Crazy Stock Market a Dream for Traders
While investors were left reeling from what is considered an absolutely terrible week for stocks, it provided unbelievable opportunities to those who are good at trading indexes.
This week was as tough as they come for investors, with the first four days producing massive losses and the fifth being in massive loss territory until the last 15 minutes of the trading day. While many investors see this as the worst week ever, this may be the best week ever if you trade indexes on the futures market or by trading contracts for difference.
This last 15 minutes of Friday’s trading alone offered a truly spectacular opportunity that you just don’t see, especially on the upside. We had just come off a little downtrend, although on this day a little trend means over 300 Dow points, and when the last 15 minutes hit and things started to reverse hard, it was time to buckle up and go into ludicrous mode.
We often get run-ups close to the bell, especially on Friday, so the potential of this move was not lost on traders, although no one expected it be this big. On the other hand, on a day where 100 Dow point road signs go by like a blur when things are moving, this did have a lot of potential, and it sure delivered.
With as much volatility as we’ve had this week, this required traders to trade more carefully, which sometimes means dropping down to shorter bars, because things shifted so quickly. You could move 200 points in one direction in a flash and then reverse out of nowhere and move that far or more in the other direction. This requires traders to need to be more nimble than usual, sometimes needing to go with one or two- minute bars when you normally might go with 15-minute bars.
If not, you would have missed a good part of some of the moves we have seen this week and especially on Friday. There’s always a lag with any trading strategy, and Friday was not a day where you could afford to lag too much, because what normally may amount to a lag of 20 or 30 points became a couple of hundred or more due to how turbo charged the markets became.
This is exactly what we want as traders, and seeing a 800 point move in 15 minutes, which went up so cleanly that you could track this with one minute bars without even any hesitation, is as good as it gets, and actually better than it ever gets, other than on this magical day.
With full leverage, this allowed traders to easily achieve a 50% return on their money in just 15 minutes. There were enough other easy trades throughout the day to make this number much bigger than this if you knew what you were doing.
We started out by going straight up at the open for almost 400 points, and a 400-point gain for the Dow is a big up day in itself. This was followed by a clean reversal which was even bigger, almost 700 points. There will always be slippage here, which is why you wanted to be using 2- minute bars to get you out and in on the other direction fairly efficiently.
The more something bounces around, the shorter the timeframe that we need to be using, and choosing the best timeframe is a very advanced trading skill that very few traders have mastered. It’s not that this is all that difficult to implement, but we need to be aware of what the benefits are in tailoring our chart views more to the market and not just going with some arbitrary timeframe that does decently in all conditions but is the master of none.
Looking at Friday’s chart, the 2 minutes looks pretty choppy, but this is all a matter of scale, and many of those little moves were 200 points or larger, which is of a size that we definitely want to distinguish and look to profit from, and especially do not want that much lag.
While some may think that a day like Friday would require bigger stops due to the volatility, this would have been a big mistake. With this much momentum, we need to get on something that is moving our way right out of the gate and end the trade immediately if this does not happen. While the potential for profit may be so much greater on a day like this, we do not want to be careless either and have to work even harder to manage our risk because there is so much more risk, especially given all that leverage we have.
The other days of the week would have been fine to use a standard 15-minute chart, even though at times that would not have been ideal, because most of the action was downward and when we did get a reversal to the upside, the reversals weren’t anywhere near as abrupt as the crazy action on Friday. There were only three trades on the 15 on Thursday for instance, the sell-off during the first hour of trading, a rally during the next two and a half hours, and then the big sell-off of over 1000 points which lasted the rest of the afternoon.
Wednesday’s action was also very distinct, with an upward move that started in the early morning hours, reversing a couple of hours into the regular session and then continuing to decline until after midnight. Tuesday’s selloff had us short the entire day where we moved 1000 points straight down on this timeframe. Monday’s action was a little choppier, a lite version of Friday, and while good money certainly could have been made on the 15-minute, traders benefited by using shorter bars as the 15 didn’t carve out these moves as well as we would want.
These Moves Are Things of Beauty to Traders
In addition to the size of these moves, what really stood out this week is the sheer ease of staying in these positions, being driven by considerably more powerful forces than we normally see. We can see these things happen to the downside once in a while, but not like this, and not so many of them packed into such a short period of time.
There is nothing like a big stock sell-off to put money in the pockets of traders, and while tears are flowing from the eyes of both investors and traders when these things happen, investors shed tears of sorrow while the good traders are crying tears of joy. It just doesn’t get better than this and may never again in our lifetimes.
Make no mistake though, we’re talking about using considerable skill to pull this off, and for every trader that has made a killing this week, there are many more who have had their heads handed to them. If you think that this is a time where you can give your trades some room in the hopes they may come back, that’s a bad idea at the best of times but a deadly one this time around.
Managing risk properly during these hectic times requires that we approach our trading with considerably more care, even though we need to be doing plenty of that during the tamer times as well. With things moving so quickly, your trade needing to move in your favor the moment your feet hit the ground is critical. Since it is moving fast both ways, if you let it move against you, you will soon be holding a significant loser, which is not acceptable.
The thing that a lot of traders don’t realize is that you can take a shot at something, and the timing may not quite be right, if you can keep your losses with these small, you can do this several times before you hit a good trade and still come out well ahead. We need to be focusing on taking shots even more during volatile times, as this is needed to keep our risk in check and shoot for the bigger potential for gains in a way that is safe enough.
The key to doing this right is to bail quickly but be ready to jump back in if conditions improve, and also be ready to jump the other way if we start going in that direction. You see a potential upside move for instance, you see it move enough to make it worth trading, then it moves against you. You get out, and then get ready for either it starting to take off again or resume its downward move, and don’t hesitate to pull the trigger on either depending on what happens.
It might just trade sideways, but there hasn’t been much of that this week, and it’s been a feast one way or a feast the other way pretty much all day, and you just need to figure out where the party is at any given point in the day. This whole exercise is made a lot easier by having the trends so distinct, and that’s the part that is really the trader’s dream since this makes it so much easier to trade than normal.
What we want to do in order to learn this craft is to look at how we may have traded to do well on a given day, and after we do this enough, we gain a better and better understanding of what works and what does not. We need to be reflecting on this each and every day that we trade, and this is how we may eventually get to the point where we not only get better overall, we may also see our trading become more adaptive, where we would know to use shorter bars on Friday but not on Thursday for instance.
There are some days which are decidedly positive, and others that are decidedly negative, and days that mostly move one way are going to be more suitable to longer bars than shorter ones. When we see days that are back and forth a lot, this is where we will benefit more from shorter bars because they can adapt much more quickly.
Understanding that this game is really all about managing risk is not optional, and this in itself defines the great traders from the bad ones. We will be trading aggressively, but this will mean that we will aggressively look to manage risk, and this is how we can work our way up to using a lot more leverage and see rates of returns that make the returns with investing look like chump change.
There are some people who at least call themselves traders who will tell you that they shoot for 20-30% returns per year, like investors do, and feel that anything else beyond this isn’t realistic. These people don’t use much or any leverage though, and if you multiply their numbers by 20, this turns their paltry returns into some real monsters, especially when you allow for the effect of compounding.
If you double your trading account, now you can trade twice as big, and even though you may not want to be this aggressive with ramping up your sizing, trading raises the power of compounding to its true potential. Investing, on the other hand, doesn’t involve much of this at all.
If you invest $10,000 in stocks, let’s say an index fund, and the fund goes up by 300% over a number of years, you have $30,000 less the loss to inflation. If you do this with trading, now we can really use the rule of 72 and our $10,000 becomes $190,000, with the same 300% gross return. Of course, you can get to 300% a lot more quickly trading, perhaps even in a single week like this one, although it was simply extraordinary and was like packing weeks or even months’ worth of very high opportunities into a single day.
Are We Finally Coming to our Senses a Little?
From the perspective of investors who may have wondered when all this would finally end, when the big money on the long side would come to their rescue, that huge rally that had traders doing cartwheels of joy to end the trading day on Friday does speak well for our being ready to turn this all around.
All week, the bears ended up quashing any rally that the bulls tried to start, right up until the last 15 minutes that is, when the bulls completely took over and a way that well surpasses anything we’ve ever seen before. You just don’t ever see the Dow moving up 800 points in 15 minutes or anything remotely close. This qualifies as a genuine crash, but to the upside, and markets just don’t crash to the upside like this.
In spite of what the tape says, Friday’s trading was a very bullish day, during the regular session that is, and the regular session is the one we want to be paying attention to. If you measure from where the market opened to where it closed, this was one of the better up days of all time in fact, and all of it happened in the last 15 minutes of trading.
At some point, we’re bound to get our heads clearer about this coronavirus thing, and have big funds wanting to jump on these lower stock prices. We’ve got the weekend to deal with now before things open up again Sunday night, where the all-out efforts of the media to blow this fairly minor thing into epic proportions may stir up enough new panic to push back the value buyers once again.
This issue was hardly even worth mentioning from a relevance standpoint, at least as far as the virus itself goes. The body count of 2,900 may look big in isolation, but this is really a meaningless amount as far as these things go, when we look at how it stacks up against infectious diseases in general, where 2,900 is just a drop in the bucket.
The death toll will grow, but given that the worst is clearly over here, which can easily be gathered from just looking at the numbers, we probably won’t even get to 5,000, another meaningless amount in the grand scheme of things.
How people are thinking that this is or even could be a pandemic simply defies belief. The Spanish Flu was a pandemic, but that ended up killing 50 million people. We’ve had some smaller ones, only killing hundreds of thousands, but there’s two necessary features to a pandemic, it has to kill a whole lot of people and it has to have a global impact.
Somehow, the bar has been lowered to the point where all you need now is a global impact, where they are even counting all the countries with one infection as impressive to look to stuff this scarecrow with more chaff.
We’ve had this play out for over a month now, and saw it run its course in China, where the vast majority of cases occurred. It has been almost fully contained there, even in the province of Hubei, where the vast majority of the deaths occurred. It was less concentrated in other provinces, but the show is almost over and we did not even come close to numbers associated with a pandemic, in the heart of the jungle where most of the virus has been concentrated.
Most of the new cases are now cropping up outside China, although if we look at the average number of infections per day since this started, the numbers have been on the decline for two weeks now. The number of cases settled, with the patients either recovering or dying, has finally surpassed the number of active cases, which is dropping considerably each day.
The fact that they are talking about a pandemic hitting the United States, which has barely been touched by this, illustrates just how much the beliefs out there have been driven by sheer paranoia. We never have all the information about anything, but we do have some good data, and we can’t just close our eyes to this in favor of taking leave of our senses.
The odds are now in favor of finally putting an end to the acute stage of this at least as far as stocks go, although if how we have reacted thus far is any indication, it’s hard to be sure of anything. Next week could be more of the same, and perhaps a second case in one of the countries that have only one, or other ridiculousness, will have us reeling day after day for a while yet.
If the numbers do start accelerating to the point where we’re adding more cases each day than we did at the height of this, perhaps we could start to talk about how big this might end up being. At present, we need to realize that this is instead resolving, although it is reasonable to expect that places that the virus has spread to more recently will take time to get to where China is now.
The panic may not be over just yet though, due to our not really understanding what is going on very well. Traders don’t mind any of this though and the more fear, the merrier. Having the means to make a lot more money in the “good” times and even more during the “bad” times will tend to influence you though.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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