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.
While you can ride a big market move if you entered before it took off, you’re exactly right that you can’t chase it and expect to succeed. Good article.
Great article. The article happens to be one of the “red flags” on my OXY trade. The whole oil sector gapped up, and I chased it with a break of HOD on OXY.