Market Panic Planning For Intraday Traders

Today's article on "market panic planning for intraday traders" came to mind after recently posting an article on Battery Backup and Surge Protection For Traders.

While learing to trade stocks/options and then actually performing the trades themselves, most of us probably will not think about things like: 1) losing electricity, 2) a power surge, or 3) what to do when you have an open trade and just when you try to get out of the position, market panic comes into play. I know I never thought of any of these until after I had my own experiences to share.

Based on my experiences, I can tell you that it'll cost you money to learn the hard way like I did. Hopefully the articles I write will help those of you willing to learn from others and take action on your own.

For this article, "market panic planning for intraday traders" will refer to an intraday trader having an open long position that you entered intraday, either scalping or day trading, and you are only planning to be in trade for a few minutes at most.

Market Panic Planning for INtraday Traders

Going further, "Market panic" will, for this article, refer to having that position open and all of the sudden a news headline comes out that is very negative for the stock you have a long position with and market panic ensues.

Rather than use a hypothetical example, I'm going to use an actual past trade of mine (the actual prices are not accurate but the stock and price action will illustrate the point).

My example: A few years ago I had opened an intraday position (for scalping, with a large position size and small mental exit price points upon entry) on Navistar (NAV). I remember it well (too well). It was around midday and just about as soon as I bought my shares, as I was watching the stock chart looking for a small gain of 1-2%, the stock began dropping....

Normally, a declining stock would be expected as stocks go up and down on a regular basis of course, but this was different... I'd say I watched the stock drop 5-10% in a matter of seconds with a tremendous increase in volume...

So, what do you do when an open position goes against you and hits your mental stop loss (if you have one, and if not, when a stock drops a large amount against you in general)? 1) You try and get out as fast as you can or 2) You try and figure out why the large drop is occurring (I've found it has been safer for me to act first and then ask questions later when it comes to exiting a position. You can always get back in again later if needed.).

If you enter a market order to exit a stock that is dropping fast, you could get filled several percent below where you expect (I've had that happen also). So what happens if you use a limit order, a bit below the current price, to try and exit a position only to find that there was so much volume on the stock and much more than usual, that your order doesn't get filled in time and the stock keeps dropping?

I entered a limit order, the stock kept dropping, my order didn't get filled so I cancelled my exit order only to find that there was so much volume and activity of people heading for the exit as I was, that my cancellation order never was confirmed! Since it wasn't confirmed, I couldn't re-enter a lower closing order because you can only have 1 order in at a time for the same position.

So, I called up my brokerage account to speak to a live broker. They had to call down to the trading floor to confirm my order cancellation and.... there was so much volume on NAV that they couldn't confirm my cancellation either because they were still going through all of the orders entered.

Damn, what a day that was..... I think it was an hour or so later that my cancellation finally cleared and I was able to exit at a substantial loss.

So how can you market panic planning for intraday traders help you? Well, 1) instead of using mental stops, think about using an actual stop loss order and then if you want to exit sooner, cancel the stop loss when you are about to place your exit order, 2) be sure to use proper position sizing and take into account that a sudden large percentage loss can happen at any time or 3) plan on using a market order ahead of time to exit positions and be willing to take a larger than expected loss in the case of sudden moves against you.

If you don't think about what you would do in a situation like this ahead of time, you may wind up panicking yourself and making the wrong decision because you're not thinking clearly.

I hope you enjoyed this article.....Trade smart and trade to win!

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