Trading Insight – What to do When a Market Starts to Fall?

Amid some recent falls in markets that have been getting a lot of attention lately, this trading insight shines the spotlight on what to do when markets start to turn against you. First, we will peak at some of the markets that are taking a hit following a strong move long. Then we will consider some of the emotions and actions that are likely to ensue.

Downturn on Plethora of Markets has Investors Panicking (List of Assets)

The recent downturn on assets has got the market spooked, with a range of them hitting all-time highs recently. Those buying these assets over the past couple of weeks, may have been listening too well to their local cab driver.

The markets on this list are:

• HK50

• US30

• UK100

• AUS200

• XAUUSD (Gold)

• BTCUSD (Bitcoin)

Having a series of strong bullish candles will often see a market retrace its steps. There are a few reasons for this. Let’s dive a little deeper.

1.      Buyers are taking profits and closing out positions, thus selling.

2.      Opportunists are shorting the extended high prices for a profit on the anticipated price movement

3.      Value seekers stop buying into a market that they feel won’t continue higher, especially when compared to other assets with more potential upside and sometimes less risk.

While a few down candles shouldn’t be the cause of panic, given the market often retraces from highs, it can send investors into a spiral when it comes to deciding if they take the profits and run, or hold and hope.

Fear of Taking or Losing Profits

In the reasons shared, each of the conditions lead to a prominent downward trajectory if the majority of the market is on the same page. Breaking this down, what can we learn from this action in order to better prepare ourselves to trade.

Consider the Implications

Money

The implications will vary depending on a trader’s situation. For example, if money is tight, or that money would be better designated to another asset, traders may struggle to ride a downward wave and maintain a good mindset. This can lead to closing a trade early or changing their mind based on the purpose of the trade.

Conviction of Analysis

If the trader isn’t already convinced the longer term trade plan will work, this could also lead to exiting a trade early. Additionally, it is important to consider risk management and letting trades run enough, but not too much based on the overall portfolio.

Holding Costs

Holding costs are another consideration for traders looking to hold for the long term. Swap fees may be positive which could mean earning the overnight rate on the trade. On the other hand, swap fees could be a cost to the trade and holding it for longer may create more of a cost than is worth to hold the position longer term.

Adapting to The Downturn

Look at the Data

If the trade is meant for long term, check the charts, news and other information relating to the time frame you originally anticipated buying the market for. Gather the information, reflect on your original trade plan and write down what ‘should’ happen based on this analysis.

Consider the Opportunity Cost

Will this trade be worth holding, are the better opportunities out there or can the trading account ride this wave out?

If a trade is reducing your potential to take on other better opportunities (be it from margin or from the trade plan you have set, i.e. no more than 3 trades open at any one time), the trader may prefer to simply close the trade rather than hold and hope over the longer term.

Consider the Effect to Statistics

Many traders, particularly algorithmic traders, want hard data to work with and devise and adapt their trade plans and executions to. By chopping in and out of markets based on fear, greed and other emotional patterns, it limits the value of the raw data for the account. This means that to consider this data if trades are closed early, added to and the like, it would require future manual input to maintain similar results. The time value and hard data may be worth more than the odd trade alteration due to a drop in price, so trusting a trade plan or algorithm may be worth more than closing a trade early, even if it might lose.

 Making a Decision

If money isn’t needed from this trade for other things (be it bills, holidays, other trades or investments), then it becomes about the purpose of the trade itself.

For a trader looking to develop a history of trading data in the account, chopping and changing based on attitude, media and price changes alone, may not be the best idea. Which leads to the next reason to cut the trade.

Risk management means not losing too much on the trade as it turns against you. In saying this, the market will ebb and flow frequently, so it is important to maintain a stop loss level that suits the probabilities and trade setup.

Then there’s the analysis.

The analysis of the market may say this is just a pullback and could be temporary. It then becomes about the assessment of whether a better trade could be taken while this market gets into a more opportunistic price point if the retracement is expected to take some time.

Considering the holding costs, opportunity costs, entry and exit costs, tax implications and so on will come into play depending on what the trader’s setup is.

Comfortable Stops and Probable Outcomes

Setting a stop loss that is acceptable on a monetary and account risk basis is critical to long term success as a trader. If the stop is comfortable, the target could be defined as a probable outcome without incurring too many alternate costs along the way, the target is worthwhile hitting compared to the current price and there is no reason to exit (such as the money is needed elsewhere), it would be heartbreaking to see the trade go to target if you close out early.

Deep breaths, assess the conditions and make your decision wisely.