Reeling in Trades in a Market with ‘Deadliest Catch’ Conditions

The Bering Sea, off the coast of the Alaskan peninsula. It’s crab fishing season and for a brave few, the chance to take home a year’s worth of pay in a matter of weeks.

Or come home empty-handed and face financial ruin.

That is, as long as you live to cash in on the catch: the fatality rate on a crab fishing boat in these freezing waters is 80 times that of the average worker.

Like the hands aboard the deck of the world’s ‘Deadliest Catch’, the volatile seas of the market are where profits are brought home, or accounts sent to the bottom. Knowing how to safely profit from volatile markets consistently can be the difference between a full-time income and an embarrassing foray that you’ll spend years living down.

Mercifully, there are ways you can tame the waters and bring home the haul you’ve been looking for.

Spotting rough market waves you can profit from

Believe it or not the Alaskan King Crab fishing season only lasts for two to four weeks. Just enough time for crews to head out and catch their quota for the year. Waves routinely top 60 feet and the captain of the Time Bandit (of Deadliest Catch fame) said that he once saw a 120-foot swell.

In the rough seas of the market, volatility can be spurred on by news events, interest rate developments — anything. These storms can be easily spotted by their steep candle formations barreling in every direction. Fueled by volume and plenty of liquidity, they can rage for extended periods of time.

In these moments, where price is trying to find the calm waters of a new level and consolidation, you can profit — as long as you know what to look for.

Establishing markers that price will respect

If you can manage not to get hurt as waves crash the deck and cages swing wildly back and forth — you’ll be in for the ride of your life.

While you’re not shooting for a year’s worth of income with one trade in a volatile market, getting in at the right time can certainly give your account a nice pop. The key is plotting an entry that will be respected by price when it reaches that level.

Getting in at the right time can give your account a nice pop.

To start, simply look left on a long-term chart. Note last week’s market reaction to the little shindig the Fed held in Jackson Hole, Wyoming. As the world of markets watched for an indication of what would happen with interest rates, the ES calmed down. Then Janet Yellen took the mic and the candles went crazy.

A fast and effective way to prep for this event is to plot support levels using a 240-minute chart, looking back 90 days — or even more. Using this gives us levels to watch for as potential entry candidates. We can be confident because they’ve been tested.

Letting the catch come to you

Skull fractures are among the most common injuries sustained by deck hands on a crab fishing boat. That’s right, a cracked skull — usually from hauling the pot (the cage that holds the catch) aboard — a particularly dicey maneuver.

When price is swinging wildly, grabbing an entry that’s profitable while avoiding a knockout that has your account seeing stars can be dangerous. With the help of your support levels you can wait and plan instead of lunging and missing.

As price reaches a support level, keep an eye on an oscillator like the RSI (Relative Strength Index) or the MFI (Money Flow Index). This will tell you whether the conditions are slowing for a bounce or barreling for another level.

Zooming in on our ES example, your moment finally came as price approached a support level AND dipped below 30 on the RSI. This was your indication that price had reached oversold conditions, AND — reached a historical support zone.

Getting in at this level with a long would have netted a solid profit in short order. Using the RSI you would have also seen that price wasn’t done crashing and an entry would have been risky business.

Ignoring dangerous distractions that lose

Many argue that it’s simply not worth the risk when the markets are this volatile, especially when dealing with news. Attempting to trade ahead of the news or even with the news as it’s happening are excellent ideas if you’d like to clear your account.

Trading the bounce or the fade, after the markets have digested the news, is often the highest probability play. Doing this brings time and history on your side:

  • Time: A chance for the market to respond and clearer heads to prevail.
  • History: Prior support levels that price will respect as the heat of the moment subsides.

If you feel that you may be leaving money on the table by not capitalizing on the first initial rip or dip in price, consider the risk (loss) you would have absorbed. If a central bank chair gets out of bed on the wrong side that morning and strikes the wrong tone — your prediction (guess) could lead to disaster.

Bring home a catch you’ll tell stories about

At last count there are 89 boats faring the unforgiving swells of the Bering Sea to bring home the max catch of the coveted Alaskan King Crab. In today’s market, the equivalent can be found with the mammoth institutional traders that drive 90% of the volume.

You can take their activity and the volume that fuels volatility and harness it to your advantage. Instead of heading to the middle of the ocean with your small account, fish on the edges where price is breaching extremes.

Steer clear of the fray and watch for price to exit consolidation zones as conditions become overbought or oversold. Know that the violent waves will push it your way, and wait — don’t race. Hold firm to your entries at the edge of value and exit when price reaches fair price.

Sail home to the safe harbor of an exit with your account loaded with a year’s worth of profit, letting the big ships do the work for you.

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