NY Times bestselling author, Lawrence McDonald, said it best this morning in one of his tweets, when he warned, "Be nimble. Expect violent rallies and declines as hints and starts of 'deal' rumors filter through the market". This is absolutely the approach that we are taking with our clients at FuturesANIMAL, and which I have expressed to traders in the past view articles that I have published via TheStreet.com (TST).
Take the past two trading days for example. Both days kicked off with considerable weakness in the equity indices. Looking at the December E-mini S&P 500 futures contract, yesterday we hit a low of 1673.25 right on the open before bouncing to 1691.75 and then closing at 1682.75. This morning we hit a low of 1663.25 just before the lunch hour on the east coast, with a solid 10-point bounce right back to 1675 within 2 hours of trading.
For futures traders, as well as options on futures traders, if positioned correctly and in tune with the pulse of the market, such swings can present a very stimulating trading environment. However, at the same time, if positions are not monitored frequently, a volatile trading environment such as the one we are currently in and the even more hectic environment which I tend to believe we are about to enter, can leave a trader crippled with positions that have quickly gone south.
With that said, we continue to stress that such markets require the implementation of proper risk management practices. While protection via options is more costly than it was just yesterday, with the CBOE Volatility Index (VIX) hitting a 3-month high of 18.71 today, the cost of that protection will likely pale in comparison to being caught on the wrong side of a trade in a market that trades with a 20 point range as it has done in recent days.
Remember that being "nimble" does not simply mean getting in and out of trades quickly, but also implies comprehension. Disciplined traders have a plan, which includes exit parameters along with an astute understanding of the risk involved and how to effectively control it. With that said we will end with a favorite quote of mine:
"The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair" - Douglas Adams
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At the time of publication, Travis McGhee held positions in SPY.