MarketLife Ep 22 – Acts of God: managing market extremes

Podcast-Cover300This podcast episode looks at trading around market extremes, Acts of God, and very large market moves. From market history, some examples might be 9/11, 1987, Fukushima, Katrina, etc. Today, Greece has the potential to lead to these types of moves and extremes. Technical traders need to understand these moves, and to be humble about our ability to predict. In this podcast, I hope to share some ideas about these events–and maybe even to show you how to think about them. Here are the show notes:

  • “Acts of God”: a legal (semi legal?) term for events caused by uncontrollable and unforeseeable natural forces.
  • These can be:
    • Big or small.
    • Transitory or long-lasting… but isn’t that the question?
  • We are framing the mean reversion / momentum question in a different context here, but the same ideas apply:
    • Will the market stop?
    • Snap back?
    • When and where?
  • Generalize this idea to “price shocks”:
    • Define: large volatility-adjusted moves, on whatever timeframe you are looking at.
    • Unusual, perhaps even rare.
  • Classify price shocks:
    • with-trend / counter-trend
    • clear news explanation / no news explanation
  • expectations might be different, depending on category
  • Guidelines for managing:
    • With these moves, we’re off the map
      • There are no magic lines or guides that apply
      • Human emotion is driving markets
    • The best technical concept that applies is “trading in climax” areas
      • One-sided market moves create vacuum. At some point (when?) the market will snap back into that vacuum.
      • Large market moves followed by large moves in the other direction usually lead to some type of consolidation or oscillation around a central price.
    • The biggest mistake you can make is to assume the move will go on forever. (However, jumping in front of a moving train (substitute whatever analogy you want to make) is also a pretty significant mistake!)
    • Is the answer different if you do/do not have a position? Maybe?
      • Large gap against position (e.g., 5 year event, not 2 month!) might be one of the few situations in which you want to add to a position at a loss.
    • If you don’t have a position, reduce position size.
      • You reduce risk and opportunity together.
      • You aren’t going to make a killing, but you aren’t going to get killed.
      • If you were able to predict the volatility perfectly, you could reduce these events to “normal” trades.
    • Hindsight is 20/20. Do the best you can and don’t get run over.

If you enjoy the podcast, one of the very best things you can do for me is to leave me a review on iTunes here.

Also, if you like the music for this podcast, then be sure to check out Brian Ashley Jones, my friend, and a fantastic singer-songwriter.

Enjoy the show:


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.