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Worried about a stock market crash?

December 3, 2017

Friday was a wild ride for the stock indexes that started first thing in the morning with investors bidding up stocks due to confidence that the tax reform bill will pass. AlgoLab's two main systems "SuperSystem" and "DifferenceEngine" picked up the spike in ES, YM and NQ, then immediately gave it all back when the news about the Michael Flynn arrest hit.

 

It is Sunday afternoon right now, 10 minutes before the market pre-open, and I'm sort of thinking that the equities markets are starting to act a bit "crashy" with exaggerated fluctuations based on fear and exuberance.

 

The last major stock market crash in 2008 was a very profitable time for AlgoLab according to the historical back test using Performance Viewer. Below is a screen shot from PV showing our theoretical 172% equity run-up right after the September 29th, 2008 stock market crash. Also note that this was a particularly VOLATILE time with a $35,867 maximum drawdown (on a $100,000 of capital account).

If a dramatic plunge in stock prices is in the cards over the next few weeks, I would like to remind you of a couple of things:

  1. Crashes are accompanied by an increase in volatility, which means, that we could be seeing higher drawdowns as well. Watch your risk levels, and understand you can't trade any fewer than a single contract per market. Read this post about risk and position sizing.
     

  2. Both SuperSystem and DifferenceEngine use a trend filter which means that when or if the markets do start to make a rapid downward move, AlgoLab won't place any SHORT bias trades for you until the price drops below the 1500 hour moving average.

Here is a great quote from my favorite trading book "Reminiscences of a Stock Operator": 

 

When the wise old trader of the brokerage house was asked by the young brokers if he was buying or selling, he simply replied "Why, I'm buying of course. It's a bull market you know!"

 

Bull markets always seem to last longer than anyone expects, so it could very well be that this one just continues on upward. AlgoLab might benefit from a change though, because so far, the later part of 2017 has been a bit "slow" for AlgoLab profits. 

 

 

 

 

 

 

 

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