How To Avoid Blowing Up Your Account During Black Swan Events

How To Avoid Blowing Up Your Account During Black Swan Events

Trading Blog


February 26, 2021

Any short seller knows that Black Swan events could bring swift death to their account. These events happen unexpectedly, and once you’re caught up in one, it’s very hard to get out without losing a ton of money. And while it’s almost impossible to predict them or evade them completely in the course of your career, I will give you some tips on how to avoid blowing up your account when they do happen. Watch the video below to see why I didn’t get squeezed by APVO on November 6, 2020, while many people lost their accounts.

How To Avoid Blowing Up Your Account During Black Swan Events

As I mentioned in the video, I traded APVO on November 5. Prior to that day, the stock followed a repetitive pattern for several days in a row. I noticed that, and I didn’t like the squeeze that happened in the last hours of each day. The runup happened too quickly, so it wasn’t really worth trying to short it. But because the November 5 squeeze happened early on, I decided to enter the trade. As you now know, I got stopped out at the high of the day and took my loss.

On November 6, I didn’t trade APVO. I was watching it, and it had the potential to be an A+ overextended gap down strategy that I like trading a lot. But instead, it kept on trending perfectly, which gave me a sign that things may not be going how I thought.

Soon, APVO jumped from $20s to $82 in a matter of minutes. And when the squeeze happened, many people got trapped in it. Most traders got squeezed, and some short traders may have held it in the hope that it would come down over the weekend. However, there’s the risk that their broker would have a margin call and close their position automatically. 

So here are several things that prevented me from trading $APVO on November 6:

  1. A consistent upward trend earlier that day showed me that I was wrong to assume that it was a clear overextended gap down pattern.
  2. The initial rise in stock price was based only on the Phase 1 drug trial news from November 3. There were no other obvious catalysts. Typically, phase 1 doesn’t have much impact on stock prices. However, in the APVO case, there was a significant spike in both price and volume traded.
  3. Market volatility was especially high due to the election that was happening that week.
  4. I have a rule against trading intraday. If the setup doesn’t lineup perfectly within the first hour, I don’t enter the trade.
  5. I also have a rule against shorting a stock overnight and over the weekend. The market has been too volatile for it.

Another interesting thing about APVO was that it only took 19k shares to trigger the first big squeeze. That makes me wonder if some market manipulation took place.

But what do you do if you see a risky trade that could be a great opportunity?

If you see some red flags yet still want to enter the trade, here are several things to keep in mind.

Go in with a small size. If the trade goes against you, cover as soon as you can. And, of course, have a risk management plan in advance. This way, if the Black Swan event occurs and the stock squeezes, at least you minimize your losses and, hopefully, don’t blow up your account.

Another general rule is not to go bigger than what you can afford to lose. The market has been extremely volatile in the past year, so you might be better off playing it safe when the risk is too high.

The rules have been changing on the go; just consider what’s been happening to the GME stock. That’s why I don’t hold short overnight or over the weekend. So many things can happen within one evening, let alone the whole weekend. You don’t want to be stuck in a trade when the news comes out that you weren’t aware of.

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