S&P plummet in Brexit proved need for pre-open limit-stops

C2
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I suggest that C2 enable pre-open autotrading.

I understand that pre-open trades require Limit orders. Limit orders will not autotrade reliably for most instruments. However, Limits and Stop-Limits can easily work very well for SPY and other S&P 500 instruments with negligible spread and extreme liquidity at all times.

Also, this would give C2 a capability that is not available at other autotrading platforms.

The Brexit effect was (so far) not severe for US investors. However, the steep Brexit-inspired pre-open plummet of the S&P 500 proved that it is possible for US stocks to lose substantial value before US trading hours. Stops and trend-trading are of no use of we lose half the value of investments before we can trade.

Perhaps we could autotrade in foreign markets. However, it would be so much easier–and ultimately more secure–simply to maintain limit-stops that would work during pre-open hours.

Of course, the problems with pre-open trading are:
(a) Market orders are not accepted
(b) Many instruments have a huge spread when outside of regular hours.

Nonetheless–many trend-trading systems can be modified so that 20% to 50% of account value is in S&P 500 ETFs or derivatives. SPY always has a very small pre-open spread. Thus–for a substantial amount of many trading systems–there can be a high likelihood of stop-limit orders working to prevent possible substantial losses during pre-open hours.

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The problem is of course that price doesn’t trade at the previous close once the news is out, and by the next morning news was out. The key to profits was to anticipate the vote. By the next morning, I’m guessing stops would have done huge damage to any account, pre–market or otherwise. Stops and mini-crashes are not a good mix.

Maybe pre-market prices weren’t as bad as the market open, but even if you saw trades in the pre-market that looked okay, check the volume. There’s always someone who isn’t paying attention and buys a few shares way above where they should be bidding. News was evident late evening in the US, in fact I was watching the SPX futures crashing all night… for the longs there was no way out.

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Thank you for the valid comments Rob. You seem to describe the “whiplash” effect that certainly causes trend systems to fall behind the underlying during upward markets. However, there is a cure for this. I call it “two-way DCA” (Dollar Cost Averaging). I.e. leave the market in steps and re-enter the market in steps.

For example:

A. Normal trend-trading whiplash: the market falls -10%–you sell–the market rebounds +10%. The buy-and-holder ends up with +0% but the trend-trader ends up with -10%.

This happens perhaps 5-10 times for every 1 time that the market continues downward to -15% or -20%–in which rare case it was worthwhile to leave the market. So in essence, you save a lot of money once in 50 years during a 2008-level recession–but if this does not happen you fall behind. Generally, it is better and safer simply to invest half as much rather than to trend-trade.

However, the US-based market (S&P 500) is the only successful market today. The average Euro-based and Asia-based buy-and-hold investors are still struggling to break even from 2008 and even from 2011. There is no guarantee that the S&P 500 might or might not behave the same during the next 50 years. In essence: it is foolish to assume that your life savings (= your life) is safe with buy-and-hold investing.

B. Conversely, two-way DCA. At a $1/trade broker, you might sell 1/5 of your investments in 5 stages. Therefore, instead of losing 10% of $100,000 (-$10,000) during a whiplash event, you only lose 10% of $20,000 (=-$2,000). Also, if the downturn deepens, you can immediately reclaim the loss by adjusting the rebuy point.

I hope to write about this in detail later.

However, suffice to say that any “system” implies a buying and selling strategy vs. buy-and-hold. Everyone has a different opinion about the best strategy. Nonetheless–what all trading systems have in common is that they all want to sell at a certain time and not wait until whatever happens before the regular market opens.

(By the way, all short-selling systems are inherently at a mathematical disadvantage. The best ways to buffer the market with a positive long-term expectation are 1. trade some individually-bought long-term US treasuries and 2. hold some gold. And that cannot compare to the degree of safety in simply closing your positions.)