What an outdated saying that title is, I thought as I started this article. Our twenty- and thirty-something subscribers grew up in a time when records were already relics. They may never have experienced what happens when a record is scratched or broken, and the same fragments of a song repeat over and over. I'm going to be true to my ancient age, too, and repeat warnings I've mentioned previously.
Monday, April 12 marked a day when many traders with credit spreads, butterflies, calendars and iron condors met their matches, no matter how well thought-out their trading plans and how well tested their adjustment plans. Many traders saw their trades hit their pre-planned max losses and were forced to close their trades. Some might have been singing the woulda-coulda-shoulda blues the next day when many securities bounced, but Wednesday followed with lower lows.
It happens. When a previous trend breaks apart, especially when that trend has been a long-running rally, moves can be violent. Many of our monthly and weekly trades, together with our planned adjustments, can handle a move of about 1.5-2.0 standard deviations over the course of the trade, depending on the adjustment plans. Most times, we can manage the trade so that the trades are profitable or have small losses, but we occasionally get hit with these outsized moves that outstrip our ability to adjust. Our trades hit max loss.
It's not the fault of the trader. In hindsight, you might question why you didn't see the downdraft coming, but we tend to fear downdrafts far more often than they occur. If we always avoided trading when we feared a downdraft, we would trade very seldom.
However, there were some signs this time that we should have been careful with our trades. Volatility measures had reached levels from which they usually reverse. Volumes were drying up even as indices and some stocks were reaching for new highs. Some bellwether indices or stocks were behaving in alarming ways: Apple comes to mind.
If you know that traders trade and that the feared downdraft doesn't always materialize, what do you do when you notice these kinds of things? If you're going to trade regularly, you need to . . . trade regularly, don't you?
Yes and no. You can examine your trading plan and decide whether your trading vehicle and preferred strategy are right for the market conditions. AAPL has been in a downdraft of lower lows and lower highs since October. Obviously selling naked puts or bullish put credit spreads might not have been a good idea once the downdraft's pattern was clearly recognized. The RUT is moving in outsized daily ranges: if you're trading iron condors or butterflies on this vehicle, it might be time to reexamine the size of your trades and scale them back, as well as definitely reexamining your adjustment plan. Not all trades are right for all market conditions, and those negative-vega trades can be his especially hard with implied volatilities pop while prices are diving. Not long ago, I suggested that, due to the levels that implied volatilities were hitting, some of you might want to consider adding cheap out-of-the-money puts to your trades, as volatility insurance rather than price insurance.
Here's where the broken record part comes in, with a warning I've offered previously. If you're new to trading or if you're experienced but know that something will interfere with your ability to effectively monitor your trades over the next couple of weeks, you might not want to trade at all or might want to keep trades in one- or two-lot sizes, just for the experience of managing them in a difficult trading environment.
This is the position I found myself in week before last. I had locked in profit on my April trade, and it was time to enter the May trade. I trade full-time, so no company was pulling me away from the markets and impinging on the time I could devote to observing my trades. However, life intervenes sometimes, and I had a whole slew of other appointments that would keep me away from my trading desk for a number of hours at a time, without the ability to adjust. I had been studying the volatility indices, the volume patterns, and the way the RUT and $DJT had suddenly begun underperforming the big caps. I trade the RUT, and I didn't like what I was seeing. I elected to skip the May cycle because of the confluence of all that time away from my trading desk and the signs of possible increased volatility.
I'll be right back in for the next cycle. If you're a newbie or an experienced trader who has a lot of time away from the markets, consider whether trading smaller, planning adjustments that can be executed via contingency orders while you're away, or eschewing live trading at all and substituting paper trades or time spent in back testing might be a good idea.