Since May 6, I've heard several traders mention they'd had a weird feeling the night previous to the flash crash. A few mentioned that they'd had a gut feeling that something was wrong, a feeling that had been building the week previous to the debacle. In some cases, such feelings led them to trade cautiously in the days leading up to the debacle. I had my own version of that gut feeling, too. That morning, I'd read a passage from a book with the word "jolt," and I was suddenly convinced that something terrible was going to happen to the markets that day.
Am I saying I'm psychic or can read crystal balls? Are all of us who had similar experiences gathering on full moons to practice some sort of weird trading religion?
Of course not. For a long while, we've had clear signs that the market was frothy. How many times have you said to yourself that this market feels just like 2007, when prices just kept going parabolic? In fact, it felt so much like 2007 that I suggested to my husband a couple of months ago that we pull out of some small long positions that we had. Then recently, volatility has increased near recent market highs, an activity that sometimes warns of topping activity.
Wait a minute: Did I say that a "couple of months ago" I suggested that we close our long positions? It was actually more than a couple. More like six. My "gut feeling" that the markets were topping actually began sending out distress signals late last fall.
So much for gut feelings as market-timing tools, right? In fact, that's what I told myself on the morning of May 6, when I'd first read that word "jolt" and felt an accompanying jolt, attributing it to some strange reason to what I expected to happen on the market that day.
Some of those experienced traders pointing to the way they survived the May 6 debacle--trading smaller, not trading at all, adding put insurance--had in fact been doing just those things for many months. I personally can not remember the last time I traded an iron condor without adding put insurance at the outset.
Again, so much for gut feelings or those weird feelings we have that our trades are going to be adversely impacted. Perhaps we should give those feelings no more weight than we would the gut feeling an anxious first-time mom might have as she sends her first-born off to school for the first time, certain that something terrible will befall him.
Not so fast, I say. I wouldn't take a weird feeling or gut feeling as a market-timing tool any more than I would the way the TED spread widens or the RVX prints a possible reversal signal on its daily chart. However, I have traded many years now. I have watched markets day in and day out. I've watched volume patterns. I've watched volume patterns in combination with price movements. I've watched the way prices interact with important moving averages and the way important moving averages interact with each other. I've watched currency movements. I've been through a few market reversals.
I realize, as I hope many of you do, that sometimes those weird feelings or gut feelings shouldn't be brushed off or dismissed. After you've been in the markets a while, it's just possible that you're noticing some details that are, as yet, under the radar of your consciousness but are nevertheless important and compelling.
Not always, of course. However, I've learned through the years that I shouldn't always brush off weird feelings or gut feelings as unimportant. Sometimes they're just a sign that I'm tired or sick or stressed, and not ready to cope with the markets that day. I'm under the weather either physically or emotionally, and I don't feel capable of or else just dread handling my trades that day. Or, I feel fine but am picking up signs that the markets may be delivering actions that I dread handling.
I don't always know which it is. Neither will you when you have those gut feelings. I've sometimes been absolutely compelled to get out of the market RIGHT THEN, and have occasionally been wrong, although not as frequently as I'm right. I wish I'd acted on that feeling on the morning of May 6, of course, by pulling out of all trades the moment the markets opened. However, I've been specifically working to ameliorate a tendency I have to take profits too soon. So, I'm not always going to act on gut feelings, but I am going let them inform my just-in-case trading plans. And that's what I did on May 6. I of course already had put insurance on my JUN iron condor, and, that morning, when the markets started down, I bought extra. At the time I did so, the SPX was still far away from my sold 1010 put. I'd already been working on a revised adjustment plan that would have me beginning to add extra puts at certain delta- or loss-based points, and I stepped in with that purchase the absolute moment the new adjustments points were barely tapped. My gut feeling compelled me to be extra vigilant.
Good thing I did step in the absolute first moment my new adjustment plan suggested I do so, because that trade was barely filled before the markets just fell apart. Everyone except those in straight bearish plays went through some of the worst or at least most confusing moments of our trading lives.
Don't always act on your weird or gut feelings, especially if you have reason to believe that they arise from your own health or stress levels, but do not dismiss them, either. It's just possible that you're picking up information that you haven't yet put together in a coherent thought process. Do let those feelings inform your just-in-case plans that you put into effect, but then let price action let you know whether your gut feelings were leading you in the right direction or not.