Sunday, March 15, 2020

Current market volatility and staying the course

In the last couple of weeks we have seen an ever-increasing level of volatility within the context of a sharp drop in price in the major market averages.

We have also started to see intervention in the markets by governments and regulators - additional liquidity being provided and interest rate cuts, as well as market trading halts (up and down) being triggered and the introduction of short selling bans on certain stocks.

The latter I had experience of in 2008, when a ban on short selling bank and other financial stocks in the UK triggered a large overnight gap up, kicking me out of some profitable short positions.

Within the last week we have seen a couple of very strong 'up' days within the context of the current downtrend. As a result, some people have been quick to jump in thinking that a reversal in price had occurred. I wouldn't be surprised if many of these people were the ones calling the top of the market for the last few years too.

I don't know if this boils down to having a desire to brag about making market calls and being seen to be right, but no trend follower will be doing that. Until there is clear evidence that the trend has reversed, they will either be remaining in cash or continuing to ride existing short positions.

Within the context of how I, or anyone else, defines a trend, price can switch from a trending to non-trending state at any time. I know I'm not clever enough to know or see this until after the event.

When these trends do finish, there will always be an element of giving back of open profits at the end of a price move, but allowing an element of "wiggle room" allows you to stay in the big moves.

Below is the chart of the German DAX, but you can look at the Dow, FTSE or Nikkei, for example, and they are all showing the same characteristics:


It's not just the indices which have dropped - the price on Bitcoin (shown below) and Oil have also fallen significantly in recent sessions:


In both of these charts we can clearly see the spike up in market volatility. This makes trying to jump in to these existing moves less favourable, as the potential reward:risk ratio is more skewed against you.

I have no idea as to whether these price moves will continue or not. All I know is that, as things stand, my charts clearly show that price is still in a downtrend.

While considering the level of open risk may result in some trimming of positions purely from a risk perspective, trying to time the bottom in a market goes against everything a trend follower will be doing.

Having the mindset of knowing that we don't know what will happen next helps us stay the course until such time any trend movement is invalidated, and a trailing stop is triggered.

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