In the high-stakes world of Wall Street, where billions of dollars change hands in milliseconds, the threat of flash crashes looms large. But if you learn how to read the charts well enough, you will be able to anticipate and identify the signals before the bots do, writes AJ Monte, founder of StickyTrades.
These sudden, dramatic plunges in stock prices – often triggered by automated trading systems – have shaken investor confidence time and time again. The infamous 2010 Flash Crash saw the Dow Jones Industrial Average plummet nearly 9% in mere minutes before rebounding, a stark reminder of how algorithms can spiral out of control.
Flash crashes occur when trading algorithms, designed to execute orders at lightning speed, create vicious feedback loops. A large sell order or a data glitch can prompt these bots to dump assets en masse, amplifying volatility and leading to cascading selloffs.
High-frequency trading (HFT) firms, with their sophisticated systems, have long been the primary culprits. Yet the landscape is evolving. Retail investors and traders, empowered by user-friendly platforms, APIs, and AI tools, are now building their own bots. These DIY algorithms often focus on strategies like sentiment analysis from social media or spotting price arbitrage opportunities.
I believe it’s critical for traders to master technical analysis. The majority of bots being created nowadays will be triggered when certain technical signals exist. Learn to read the charts well enough and it will most definitely give you an advantage.
In addition to learning technical analysis, I believe it’s important for traders to learn how to trade options spreads. Spread traders are able to find high-return opportunities with limited risk, which means that even in a flash crash, you won’t suffer a catastrophic loss if you wind up with a position opposite the market.
Learning these two things, technical analysis and options, will take away a lot of stress associated with trading high-volatility conditions.
