Trading After Dramatic Re-pricing of a Market http://www.netpicks.com/trading-dramatic-repricing-market/

When there's a dramatic repricing of a market, such as the one recently seen

in Crude Oil, there's a period of instability in the market that can be very costly if you fail to take it into

account.

The old trading adage that "the market takes the stairs up and the elevator down" really applies here. Dramatic repricings tend to happen whereby

markets sell off hard and fast, so there's an element of bargain hunting

that inevitably goes on.

People are looking to take advantage of oversold prices, but there's always the selling momentum that motivates

more selling as well.

Big firms in trouble can and do have to scramble for the exits and this can

exacerbate the moves lower whilst the hunger for bargain basement prices intensifies as a market threatens to

retrace.

Opportunist day traders hang on every bit of news, every comment that might

be relevant and every rumor in the hopes of catching a piece of the

action. Ranges become larger and risk becomes greater.

Over the financial crisis of `08/9 this happened across a broad range of

markets. This is what it looked like in the E-mini S&P500: -

Firms who get into trouble, bargain hunters, opportunist traders and

probably many other categories of participant motivated by the huge shift

in prices, serve to increase volatility.

The fact that there's more business that needs to be done, that it's done

more aggressively and it's done in often much thinner markets

exacerbates moves to both sides.

Thinner markets occur as a result of volatility. An orderbook that once

might have been full of bids and offers becomes much thinner.

This is for several reasons.

Ultra short-term algos tend to get switched off and they usually make up

a large number of orders queuing in the market at any one time.

Traders can adjust their usual position size to take account of the extra

movement and normalize their risk.

Traders are less willing to "show their hand" by queuing for prices.

A clear-out of the orderbook in this way can help the order-flow to improve but does change the

magnitude of movement. Average ranges and additionally, the number of

tradable moves will increase.

Taking a closer look at the stats, it's easy to see the differences that it

makes. For example, in Crude Oil, the 20 day ATR in June last year was at

1.07 per day compared to its current value of 2.89. That's an increase of

over 150%!

But what's more valuable to most of us as short-term traders is the fact that

this drips down into smaller timeframes

The 20 day average range for each 30min candlestick is displayed on the

next chart.

I've added lines for the daily peaks/troughs for both today and as a comparison, for before the sell-off in

Crude Oil.

You can clearly see in this chart that the 30min average ranges have

increased by a similar factor to what they have on a daily chart.

The point of demonstrating to what degree the level of movement has

changed, is to help you avoid making the mistake of thinking a move that

might have been big before the repricing, has some sort of wider

significance in the market's current heightened state.

You shouldn't expect that a move in crude that would've been big 6 or so

months ago means anything in particular right now. The participants that I've already mentioned above are probably active and markets can move

what seems like a great deal for no particular underlying reason.

But the fear of missing out on a great move generated by news or the like

can easily have you reading something into movement that shouldn't be.

Knowing what the normal movement is for any market that you trade is vitally important in order that you

have a frame of reference for what the market is doing and which types of player might be active. But studying

market movement isn't just a one-time thing either-

markets are organic and as such, their movement and behavior undulates

based on the current conditions and driving forces. When there's a

dramatic repricing of a market, what constitutes "normal" can at least

temporarily change fairly dramatically.

Just because you see more winning trades than losers does NOT mean you're coming out ahead. In fact, you *could* be teetering dangerously close to the edge...

and one losing trade could mean total wipeout!

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