Is Trading Against Spikes in Boom and Crash the Great Mistake Most Traders Make?

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InsiderFinance Wire

4 min readAug 2, 2023

In our opinion, trading against spikes in Boom and Crash can be a mistake for any trader. Since we do not believe that most traders trade this synthetic financial instrument, it is probably not a risk to a large number of traders. However, the lack of traders who engage in trading Boom and Crash is probably made up for by the frequency and magnitude of losses caused by trying to trade in a system where a random number generator decides where prices go next. How a disciplined day trader handles spikes and crashes in real market driven by real fundamentals and real market sentiment is a totally different matter.

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The Great Mistake of Trading Against the Spike and Crash

The Spike and Crash “trade name” refers to a “trading opportunity” offer by the Deriv broker. There is no underlying equity to trade. There are no fundamentals that drive prices. And there is no market sentiment to tap into to help predict where prices are going. It is, in fact, a glorified version of a trip to the casino in which a random number generator creates all of the price action. It is for those who hope to make money trading but do not want to learn the discipline needed to successfully enter, manage, and exit their trades. In reality, the great mistake is getting involved with this scam instead of trading things like commodity futures, currencies, stocks, or (Lord forbid) cryptocurrencies in the real world.

Understanding the “Spike” and “Crash” of Market Trends

Spikes and crashes occur in the real world of trading and are of special interest to day traders in search of short term profits. This is because these market movements are rapid and commonly very brief. They often happen when a bit of news hits the market. Just recently a Bloomberg news item said that Apple was involved in AI. Anyone who follows Apple knows they have been working on this, so it is not big news. However, Apple’s stock price spiked and then fell over just a few minutes. Anyone who understood that the market was overreacting to this bit on non-news could have traded accordingly and made a profit.

Why Does Trading Against Spikes Lead To Losses?

Things may not always be clear when the market is spiking up or crashing down. On October 19, 1987 the stock market fell 23% in one day. This was Black Monday. There were many factors that had been weighing on the market, including the decline of the dollar, rising interest rates, budget deficits, and the increasingly negative US balance of trade. Although many believed the market was overpriced, the general consensus was not that it needed to fall by a fourth of its value. The point is that trading against falling stock prices on Black Monday led to significant losses. It should be noted that this was before the market instituted circuit breakers to pause trading after 7%, 13%, and 20% drops in the market.

Recognizing Signs of a Market Reversal

A common reason the market gets overvalued is FOMO or fear of missing out. Investors want to make every last penny before the end of a bull market. Very often there is a sense that “this bull market” will never end. Rather than recognizing the signs of a market reversal by following and comparing moving averages, paying attention to trading volume, or watching the CBOE VIX indicator, investors as well as traders go “all in” as though they were playing a game of poker.

Understanding Your Risk Tolerance and Setting Stop Losses

At DayTradeSafe we teach that rules-based trading provides the most consistent profits. Understanding your risk tolerance is an important place to start when day trading commodity futures, stock, or currencies. Routinely setting stop losses on every single trade protects against kind of losses that unwary traders experienced with the recent APPL “AI spike” or, even worse, the monumental losses incurred on Black Monday. Following a rules-based trading routine keeps day traders out of trouble and helps generate profits in all markets.

Analyzing Historical Charts for Better Decisions

Interestingly, the Deriv brokerage website suggests that those trading their Boom and Crash system analyze historical charts for better decisions. When the price fluctuations in this casino disguised as a trading opportunity are generated by random numbers, that seems like a fool’s errand. On the other hand, in the real world of commodity futures trading, analyzing historical charts for better and more profitable trading makes perfect sense!