Misconceptions: I Can Ride Big Market Moves

Many tales of woe on beginning trader blogs start like this:

The markets were tanking, so I looked for short plays, and …

They don’t understand that, by the time you can see a bona fide “big market move” on your index chart, you have missed it. I’m not talking about a market in a trend… I’m talking about the sudden, exciting swings with large TICKs, etc. Just let them go. When you see an index drop like a stone, and then start running through your favorite stocks, what are the most likely outcomes?

• You wind up shorting a stock “as it makes a new low.” If I had $100 for every time I did this, I’d still have lost a ton of money on balance. Making a new low is not a reliable trading setup.
• You find a decent-looking short setup on a stock. Ask yourself, if this stock were actually ready to fall, why didn’t it fall with the market 10 minutes ago? I think these are not very reliable either.
• You waste a lot of energy looking for a high probability play, and can’t find one in time.

(of course, all this logic is true for markets surging up, as well…)

If you aren’t already in position when a market runs, then just let it go. It’s a sucker’s game to chase it. Instead, if you can anticipate a possible market swing, you can take reliable setups in trending stocks ahead of time. Then, if you get a little help from a surging index, great! Another option is to stick to stocks experiencing their own surge of volume (relative to their normal volume); they often move their own way regardless of the overall markets.

It doesn’t have to be an overall index, either… I think more “clever” plays are just as doomed. Such as, shorting stocks of companies that consume oil when you see oil surge up. You are trying to make a long-term trend raitionale fit a 2 minute scalping scenario… it just doesn’t work that way.

You might be thinking to yourself, “wait a minute… some people do ride big moves, don’t they?” Yes, and I think the successful ones are news-based traders, who were waiting for the right news catalyst to come out. They get in as the excitement starts… not when there’s already a wide bar on their charts.

If you see an index already moving, and you just have to get in the action, I think your best bet is to play the index you are already watching. Maybe it has more juice left in the current move. The advantages are: you can get in without wasting more time looking for a stock to play, and if you realize you are too late, they are liquid enough to hop quickly back out.