Panic Selling: What Happened on October 10th
Friday, October 10, turned out to be quite an interesting day for the financial markets. Those who had open positions likely noticed it firsthand.
But let’s do a super quick recap, just in case someone isn’t up to speed. During this trading session, the major indices took significant hits. The Dow Jones dropped by about 1.9%, the S&P 500 by around 2.7%, and the Nasdaq plunged roughly 3.7%.
And the bad news didn’t stop there, because if we take a look at crypto, things were even worse. The crypto market suffered record liquidation, with estimated losses of over 20 billion dollars in just a few hours.
Bitcoin, for instance, fell in a short time from over $126,000 to below $105,000, a crash of more than 15%, while many altcoins were hit with even more severe losses, in some cases over 50%.
The Causes Behind the Sell-Off
This sell-off, guess what, was fueled by the announcement of aggressive tariffs against China by the Trump administration, which triggered a chain reaction of sell orders. I’d be tempted to say, “nothing new here,” just more of the same shocks we’ve gotten used to over the past year. But there’s an important, and I’d say especially interesting, lesson we can draw from what happened. So, let’s move on to the chart.
Here we are. On this chart, we’re looking at the Nasdaq futures, one of the main stock indices in the U.S. market, shown here on a 30-minute time frame. What stands out at first glance is how, over the past few weeks, we’ve seen a rather flat and low-volatility phase.
The Logic Behind the Strategy That Profited During the Crash
That volatility then exploded during the session on Friday, October 10. As you can see here, this is the sell-off we talked about in the intro of the video.
Alright, now let’s take as an example a strategy we’ve already talked about in previous videos, one that we’ve presented, analyzed, and developed. It’s based on the Opening Range Breakout, meaning the breakout of the first bar, in this case using a 30-minute time frame of the U.S. Cash session.
To give you a very quick recap, this is an intraday trend-following strategy. If you want to dive deeper, there’s a dedicated video you can check out.
What’s interesting about this strategy, which we actually developed months ago, is that even though it trades the Nasdaq future, which is a financial instrument that tends to rise over the long term, meaning it has a bullish bias and a tendency to make new highs, we chose to include a short component, which you can see here on line 16.
In this case, you can also see that, unlike the entry condition, there’s an additional filter: we need to be on a weekday equal to 5, which stands for Friday.
Why did we add that condition? Because on average, the last trading day of the week, Friday’s session, is the one that tends to show a negative trend overall.
Okay, now let’s take a look at a few trades by adding the strategy to the chart. Here you can see, for example, a long trade, some other long trades, a few short trades, but what I want to focus on is this short trade that happened during Friday’s session.
What Sets This Strategy Apart
And the interesting part here is that even though the stock market went down, this strategy made a profit. And what did it profit from? From the fact that we decided to include a short component even though this financial instrument has a long-term bullish bias.
Of course, we could explore lots of ideas here. For example, we see that the profit target that ended up being hit was quite narrow compared to the market’s overall drop. But that’s something we analyze after the fact. It’s not something I would change in the strategy, because there’s a reason we decided to set the take profit at $5,000 in this case.
It would also be unrealistic to assume that on that Friday session, we would have been live with only this system and therefore made money just on the short side.
The Key Lesson: Prepare for the Worst Through Diversification
But the concept here, which is very important to keep in mind, is that even though we’ve gotten used to years when stock markets have gone up and made new highs, that doesn’t mean sell-offs can’t happen, or that there won’t be downturns in the short or medium term.
And that’s something we systematic traders pay close attention to, by including hedges that can reduce losses from long positions or even allow us to profit during episodes like the one that happened on Friday, October 10.
That said, if you’re interested in topics like this, you’ll find more useful info in the description. And I’ll see you in the next video.
