Fading The Big Moves by Ashot Hakobyan
Whenever we see a big move in the markets, it’s bound to catch our attention. But how do we protect our capital during such big moves, or better yet, profit from them? Find out here.
Big moves in financial markets invariably draw the attention of analysts and traders. Analysts face the task of explaining such moves, which often challenge market theories. In recent decades, analysts have developed advanced models to accommodate the anomalies in the market return distributions — that is, the fat tails — to which the big moves are often attributed.
Although theories are being constantly improved, traders still have to embrace the reality of big moves and come up with strategies to help protect them against those moves or, better yet, try and profit from them. Typically, if a big move confirms your technical and fundamental view of the market, you’re going to follow that move; otherwise, you’re going to trade against the move (that is, fade the move). Weaknesses in these big moves can potentially develop into a sizeable pullback or even a complete reversal.