August 10, 2011- Maybe the Overnight risk just ain’t worth it

Face ripping bounce is what Joshua Brown calls it in the comments section.  He writes he’s uninterested, but let’s face it, as >Mebane Faber wrote, 70% of the worst and BEST days in a trader’s life happens when the prices are below the 200 day moving averages.  When all the charts break down, everything goes back to the basics.  We go back to reading the tape.

Joshua writes: I know tons of worldly, knowledgeable folks who know everything there is to know about the economic news of the day – and they were murdered this week, just absolutely blown apart.  The reason is that they know What the news is, just not When that news will matter.

It is not enough to know what the news is, you must also know when the news going to matter.

I’ve traded during the 2008 crisis where levels were beyond comprehension.  You can get 10-20% volatility in a single day, and lose it all back with just a single gap down the next morning.  Of course, you can also get behind the whole rally, with a huge gap up the next day (which will be a time for all the people who got in early, to take their wild gains).  I remember making a lot in just 3 hours!  All my entries and profit takes happened in 3 hours.  Looking back, it does sound like flipping a coin every single day on whether we are near the bottom or not.  I remember a wise trader say that if there’s a lot of volatility on top, huge ranges, and lizards are normal volatility on the bottom too. With the way things are going, this is a long 8 month hard grind, boys and girls.

Forgive if I use 2008 studies, but I can only remember this as the reference point to traversing our waters right now.  It was an 8 month wild volatility of a possible bottom.  The range was 5000 points from 12,000 to 17,000. It didn’t mean impossibility of gains, but it did mean it was hard.  There were a lot of 50-100% movements within days both on the upside and on the downside.  I remember specifically a cement maker going from HKD 1 to 3 in just 3 days, and it’s not penny stock.  I seriously thought it was a penny stock.  Stocks during the October of 2008 to March 2009 levels traded like everything will be decimated.  There’s no such thing as having a trailing stop if you’ll get a 10% gap down the next day.  You can’t get out.  If you don’t want the overnight risk, just daytrade.    During 2008, every bank will drop 20% across the board, and it feels a little bit like that today.  Only, now we have some sort of cheat sheet since people say 2008 craziness is a thing of the past.  I don’t really know.   I

Please click the charts for larger images and captions.  I highlight the Hang Seng Index (a gauge of your Chinese counterparts’ risk appetite) as well as the popular $AUDUSD to describe the emerging markets’ leverage to the commodity story.  The story of 2008 and the current decimation of the AUDUSD level marks the return of huge ranges.  300-400 pips are normal for the AUD to travel today.  It had a 1000 pip fall in just the past 7 days, swallowing all the levels for the past 4 months in the AUDUSD.

In today’s 1500 point range of the Hang Seng Index, I thought this was quite something, but looking at 2008, this is quite normal, wherein we were travelling 3000 points from 11,000 to 14,000 or a 3000 point move in a single day.  You can see big caps like HSBC making 15-20% moves, when their normal ranges are a measly 1.5-3% ranges.

So, this is my simple plan.

Reduce all sizes to 1/10 or 1/5 of your normal size.  Adjust your stops and be very skittish.  Play the markets with all the volatile swings, and don’t make any aggressive bets.  I went long on $AUDUSD at 1.0450, I sold it at 1.0350 (took my loss) and I’m waiting for some long lizards to get me in, perhaps a retest in the parity level if that really is the short term low.  Only intraday swings are best suited for this type of market.  I day traded the gold jewelleries listed in HK, (E.g. 590,116) and I’ve been taking my profits from them.  No overnight risks for me.

I’m so glad, that I took Mr. Joe Fahmy’s advice to respect risk.  When I took my 100 pip loss in the AUDUSD, I frankly have to tell you I was pissed off that the tanking just couldn’t end.  I traded the rubber bands and I can’t help it.  The markets fell out of my perceived support and I have to preserve my capital.  I highly recommend any trader out there– to RESPECT RISK.  Tie your hands if you have to.  I know how tempting gains can be, so if you want to trade, trade according to the right size!

You have to be dynamic because face it, no one has a clue with what’s going on. You think you know, but you don’t.

– The Faceless Trader

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