Just yesterday, we were celebrating market highs. And then everything changed.
Last night (Chicago-time), the U.S. ordered an airstrike that took out a top Iranian general who, by most accounts, was very dangerous, but much beloved by Iran. Iran vowed that it will revenge the death, while the U.S. and its allies in the region are taking measures to minimize any potential retaliation.
And markets are responding in kind. February Crude Oil ($CLG0) and Gold spiked—as you could imagine. Crude Oil is up 3.7%, or $2.25, at writing, while Gold gained 1.4%, or $21. Simultaneously, the budding tension caused traders to sell off equity futures in favor of the perceived safety of U.S. Treasury Bonds.
Regardless of what happens today, the landscape shifted... at least for now. Here's what you have to know and, more importantly, what you have to do.
1. This is a big deal.
Every report that we've read this morning suggests that this is not going to blow over quickly. This is a measure that Presidents Bush and Obama rejected. Of course, in the past 11 and 3 years since they left office, many things have changed. The U.S., as well as allies in the region, say that Maj. Gen. Qassim Suleimani was responsible for much turmoil in the region, including recent aggression toward the U.S. Embassy in Iraq.
2. Markets going to be driven by the news.
This is particularly true for intraday traders. Any Tweet, breaking news story or new sign of attack will cause ripples throughout financial markets. You are not going to be the first to know. Algorithms are. And the price will move before you even realize it. This can be great for your trading P&L (if markets move in your direction) or feel like a kick in the gut (if they don't).
The first step is going to be to accept that this is the environment that you've decided to trade (and be thankful if you trade with Topstep that it's only our capital on the line).
3. Steps to take before trading today.
That said, there are definitely adjustments that you have to make. We are coming off a time period when markets were ... well, what's the opposite of volatile? Now, at least for the next week, that's a thing of the past.
Trade smaller size. Please, don't rush into today putting on max leverage. The $2.30 move in Crude Oil between yesterday's close and today equates to $2,300—on one lot. The move in Nasdaq futures, now 117 points, equates to a $2,340 move. Putting on three, five or 15 lots is irresponsible for most trading accounts. Yes, you could make a large gain. But that will just solidify bad behavior. In all likelihood, this will end badly—if not immediately, then in the future when you continue to trade large size.
Enter trades away from the market. You know a great way to make an extra few ticks? Put in an order away from the market. If you put an order five ticks away from where you want to enter and get filled, then you just "made" five ticks. Realize that there are likely very few trades that you have to enter right here and right now. The others can use market volatility to get me a better price.
Be aware of the overall trend for the day and what is driving markets. Yes, this can change—and quickly. However, you have to know whether today is an optimistic or pessimistic day, whether traders are putting on or taking off risk. Today is one where traders are positioning in this new reality. In addition, it's the start of year and a Friday. Moves are likely going to be exacerbated because of that.
As our funded trader risk manager, Mick Ieronimo, says to our funded traders every day, "Your job is to catch a part of the trend for the day." His point: it's not to have a long-term view on whether there will be war between the U.S. and Iran. It's to have a view on what can or is going to happen today. Don't let your long-term thesis dictate your intraday trades.
Risk management matters. Above all else. Always trade for tomorrow. That is our motto here at TopstepTrader. Don't do anything today that puts your trading account at risk for being able to open a trade and make back your losses tomorrow.
Dr. Brett Steenbarger has a more specific philosophy. Don't lose more in a day than you can reasonably make back in a week. Don't lose more in a week than you can make back in a month. Don't lose more in a month than you can make back in a quarter. And don't lose more in a quarter than you can make back in a year. If you keep that rule, you will always ensure you're around for the next market-moving event.
Stay up-to-date when you are in the market. No, you're not going to be the first person to know about a market move... and the market is probably going to move before you even see the news. But you have to stay up-to-date as much as you can while in the market. Fortunately, TopstepTrader has you covered.
Be sure to tune into the Market Forecast, back Monday next week, for all the latest news and insights. And join our private Facebook community to be surrounded with like-minded futures and forex traders.