Crosscurrents in markets, as in the ocean, can be deadly for those who have no knowledge or experience in how to deal with them. These crosscurrents or whipsaws can knock a day trader out of the game in short order, as markets can turn on a dime, without a warning or an available reason /news for doing so in the moment. To guard against being late to taking off a trade that has gone bad, stop orders are essential and should be part of one’s trading routine, and as second nature as riding a bike.
Chasing momentum late in an extended move may work out to a trader’s delight, but the risk rises the more extended the instrument becomes. Blow off tops and capitulation lows are not that uncommon and can trap trend following momentum traders on the wrong side of the market in an instant.
Let’s take a look at a few meme stocks of the recent past that had blow off moves:
AMC Entertainment (AMC): On June 2 AMC had a huge run peaking at 72.62 in a highly volatile session. The day’s range exhibited an extraordinary expanded trading range 35.59 – 72.69, closing 10 points below the high trade of the day. The next day was an inside the previous day’s range with a close lower than the opening. The momentum had run its course. Within 6 trading days the stock found low on June 10 at 39.71 a 45% decline from the top.
GameStop (GME): the mother of all meme stock short squeeze plays demonstrated a massive parabolic momentum move that culminated on January 28th with a phenomenal trading range from 112.25 to 483. The stock closed the session higher than the previous day, but it was lower than the opening, a clear negative sign. The following day was an inside day closing lower than the open. That was 2 days straight of closes lower than the open. Momentum to the upside had been played out. The stock eventually found a low on February 5 at 51.09 an 89% decline from the high all within 6 trading days from the high day.
Koss Corp (KOSS): The stock had a similar pattern to that of GameStop. The stock had been under accumulation for at least 3 trading sessions with expanding range. On January 27th the stock gapped higher from the previous day’s close of 10 to 17 on the open and the squeeze was on. By the end of the session the stock had closed much higher at 58 in the top 25% of the day’s trading range. Leading one to believe more potential upside might follow. Then on January 28th Koss had its climax run, as the stock opened at 74 and ran to a high of 127.45. After which selling came in driving the stock to a low of 25, closing the session at 41.96. The upside momentum had plaid out, within 6 trading days the stock hit low of 11.44 a 91% decline from the top.
So how can one navigate these highly volatile seas?
1) Trade smaller, not larger.
2) Use stop orders commensurate with the underlying volatility (meaning a wider percentage when volatility is expanding).
3) Learn to trade both sides of the market, both long and short.
4) Learn also how to stop and reverse positions.
Stay nimble, stay wary, and trade well.
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