Controlling one's emotions and a dose of common sense are essential when it comes to trading hypervolatile situations.
Take shares of DryShips (DRYS) , for example. On Nov. 14, DryShips opened for trading at $14.50.The next day the stock traded above $102, or more than 600% above where it opened the previous day. Fast-forward to the close of trading on Nov. 18, and we find the stock closing at $11.81. For the week, DRYS actually lost 18.5%.
Should one have anticipated how dramatic the price spike and subsequent collapse would be? Absolutely not. Aside from knowing how absurdly small the stock's tradeable float was, nothing in technical analysis could have prepared a trader for what was about to happen to shares of DRYS.
That said, a firm grasp of one's emotions and a bit of common sense should have kept the day timeframe trader from losing their grasp on reality while staring at DryShips' price movement. Seeing a stock open at $14.50 after trading around $4.50 just a few days earlier, should have been enough for most traders to know something wasn't quite right. But for those unconvinced by that initial 220% price spike (between Nov. 9 and Nov. 11), the jump from $14.50 to over $100 the next day certainly should have done the trick. Suffice it to say, if you deal in stocks like this, all the technical analysis in the world isn't going to save you. In situations such as these, you're relying on unsustainable price momentum and a heaping helping of the greater-fool theory.
My own preference is to avoid trading stocks like DRYS. While I can control my emotions and recognize a short-term bubble when I see one, controlling or even measuring your day timeframe risk is nearly impossible. Short-term speculation is difficult enough without adding irrational hypervolatility to the mix.
The bottom line is that while there is a certain class of trader who can approach a situation like DRYS, from either the long and short side, and emerge with huge profits, the overwhelming majority of folks are likely to leave with both emotional and financial scars. Find your niche, be it trading futures, index ETFs or momentum stocks. Then have the emotional control to look at a situation like DRYS and know you're better off steering clear of that not- so-slow-motion train wreck.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS