A “flash crash,” or whatever you want to call it, presents a huge risk for traders on the wrong side of the market. But if you are on the profitable side of the move, it can also be a little disheartening when you see all of that profit that you missed out on.
Believe me, I know.
So is there a way that we can profit from flash crashes?
Sure, assuming that you are on the right side of the market, you can always take advantage of a flash crash. In this post, I'll go over how to do it and what to expect.
What Flash Crashes Look Like and Why They Happen
Now these events don't happen all the time, maybe once or twice a year. So don't expect to get rich off of this.
But when they do, this is what they look like. Here is the Swiss Franc crash, otherwise known as Francogeddon.
This move was good for over 1,900 pips.
Then of course, there was Brexit. The GBPCAD dropped over 1,740 pips in one day.
Imagine if you caught that move!
…now the recent GBP “flash crash.” This could have put over 950 pips into the bank, at least ideally, if you traded the GBPUSD on the short side.
So how do we take advantage of these types of moves?
It's quite simple actually. Whenever you enter a trade, just get a little ridiculous.
The Ridiculous Profit Target
If you don't have a profit target set on a position, just put in one that is totally ridiculous. For example, let's look at this chart.
Price is forming a pennant on the monthly chart, and might be a good short opportunity. But it is a long way to go to get to the 99.495 resistance point and it might not get there. You probably have a nice 2R+ profit target near the pennant.
But if you trade with two positions, like I do, then you might not have any immediate plans for the second position.
So why not put in that 1,536 pip profit target?
Will price go that far?
99% of the time it won't. But all you need is that one time to make it worthwhile!
After you put in your crazy profit target, then just manage the trade normally. You probably won't keep that profit target forever.
But it is a nice to know that you have the opportunity to possibly make a huge return!
When This Works and When it Doesn't
If you are a swing trader, then this can be a good strategy. However, if you are a day trader, the probably won't help and will take valuable time during the order entry.
Also, if you already set a profit target on every position, then this obviously won't be a strategy for you.
For example, a lot of traders enter two positions and target a 1R or 2R target on the first position, and have a 3R or more target on the second position.
But any time you have a trading method that has a play-it-by-ear exit, then putting in a “flash crash” target can't hurt.
Don't Forget the Slippage
Before I end this post, remember that this is just a simple way of possibly taking advantage of a big move.
Think of it as a lottery ticket.
But don't go out searching for it by purposely trading during big news events, because just like with lottery tickets you will lose…all the time.
On top of that, remember that the spread can get huge during important news events, so what looked like a profitable trade on the chart, may have been terribly unprofitable in real life.
So trade your plan first, no gambling. The best thing to do during potentially extremely volatile news events is not to trade at all.
By adding a “ridiculous” take profit to trades that don't have a profit target, it puts you in a great position to take advantage of super volatile markets. Of course, this crazy profit target should be way outside of your normal profit targets, so it doesn't mess up your trading plan.
But just like with everything else in trading, do what works for you.