Before we get into the 3 important things you need to know about trading in fast moving markets, we need to define what a Fast Market is exactly. According to Nasdaq, a fast market is “excessively rapid trading in a specific security that causes a delay in the electronic updating of its last sale and market conditions, particularly in options.”
To further elaborate on that definition, we can reference the book, Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor where a fast market is defined as, “A market in which sudden increases in the demand or supply of shares cause sharp price movements of a stock. Market orders in a fast market are subject to being executed at prices substantially different from the prices in effect at the time the orders were entered.”
Both of those definitions do a good job of highlighting why fast market conditions can be challenging to trade in, for a few different reasons. First, due to the “fast” conditions, delays or latencies can occur with not only market quotes but also with executed trades at the exchange level. Second, this is usually accompanied by dramatic, quick, and substantial price movements where, depending on the order being filled, the executed price can be widely different than what would be expected during normal market conditions.
Now that we have properly defined what fast market conditions are exactly, we can identify three important things that you need to know to deal with fast market conditions. This is not everything one needs to know, but it’s a good start.
Don’t Trade If You Don’t Have To
First, if you don’t have to trade in fast markets, then don’t. This simple concept escapes even the most seasoned market professional. There may be times when you need to participate due to already having a position in the stock or market that is now trading in “fast” conditions. Or you may have a strategy that is designed to find opportunities during fast markets and sitting on the sidelines just simply isn’t an option. If that’s the case, then your time should be spent seeking out a broker with the best and most reliable technology for manual or automated trading, to give your strategy the best odds of producing.
Resources to Start Your Research
If you do not already have a position in that market, you do not have a strategy that looks to specifically take advantage of fast markets, or do not have a position that needs to be adjusted during these conditions, then you may want to simply avoid trading during these challenging times, at least until you feel comfortable with the damage that can be done during fast markets, or have changed brokers to a relationship you believe in.
When one stock or market goes “fast”, often there are other markets that are trading normally during that same period. Investors and traders may want to focus on markets that are trading in normal conditions or simply step aside while the market is in fast conditions and resume trading once the market stabilizes.
Check Your Latency
Which brings us to our second important point. If you must trade in fast conditions, make sure you are not amplifying the latency issues that are already present in fast market conditions.
As we already learned above, quotes and executed trades can and usually are already delayed on an exchange level. Do not amplify the problem by having improper equipment and subpar brokerage access. First, make sure you have a top-tier broker with direct access to the exchanges. This will help ensure that you are already one step ahead of the game by helping to reduce latency and even more delays that could be introduced by a slower broker.
Second, make sure your equipment and internet connections are as fast as possible. Many times, this means having a hard-wired internet connection instead of a wireless connection and performing appropriate speed tests, route traces, and hardware testing on a regular basis.
The final important point about trading in fast market conditions is to utilize the proper order types for the quick and volatile conditions. Remember, in fast market conditions, quotes and executed order notifications may be delayed so you cannot rely on either to judge where you may have been filled versus where your order was filled.
If you must trade during fast market conditions, it is extremely important to reduce your exposure to poor fills. Any order type that has the possibility of being executed “at the market” is extremely risky to use during these times, since you have no control over your fill price. Your order will be filled, but the price may be very different than what you were expecting.
Utilize Limit Orders
The main order types that can be filled at the market are of course market orders and stop orders. Stop orders, once the stop price has been hit, are executed as market orders.
A trader or investor may want to consider utilizing limit orders and stop limit orders when possible. When entering these orders, a limit price is specified. If the current price is worse than the limit price the order will not be executed. In some situations, the limit price could be a negative if the goal was to exit trade regardless of price. This could be viewed as a negative to limit orders in some cases. Sometimes a trader is better to use a stop limit order with a wider limit range when trying to exit a position during fast market conditions rather than using a generic stop order. Even if that means entering multiple stop limit orders to replace the first one that was not executed.
In conclusion, due to the inherent risks present in trading fast market conditions, the first point is still the most important. If you do not have to trade in fast market conditions, the best option is to stand aside and wait until normal market conditions return before executing your trading strategy.