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Coach's Playbook Posted by Team Topstep January 13, 2021

Melt-Ups: How to Trade the Grind Higher

Melt-Ups happen. If you were around this time last year, then the stock market might look a little familiar. Trading near market tops when volatility is low can get a bit tricky, and it can get especially risky when news headlines are ruling the tape. This week, the Topstep coaches are here with their best takes on how to maneuver through these sensitive markets. 

Funded Trader Shoutout

Big Tech companies are taking some heat after the recent purging of thousands of social media accounts, and it’s creating some trading opportunities in the Nasdaq-100 Index this week. Since hitting a new all-time high on January 8, Nasdaq futures have flattened out, but the daily moves are still wide enough to catch a decent run. 

This week’s Funded Trader Shoutout goes to Adam G., who has taken aim at buying the dips and selling the rips to chalk up a nice $7,000-day trading the Nasdaq. You’re not always going to catch the BIG moves, so it’s important to recognize when to NOT fall in love with a position and start playing the ranges. Excellent job, Adam. Keep it up!

What Are Melt-Ups?

Herd mentality, or pack mentality, can be described as people swaying to a particular bias based on their peers’ actions. In the case of stock market melt-ups, when investors start feeling the fear of missing out on a big move, they will begin to pile into the market with little regard for any technical or fundamental indicators. This is the herd mentality in trading.

Melt-Ups are rarely sustainable and can often signal that a market top might be near. You should also know that, historically, melt-ups are followed by melt-downs. When caught in a melt-down, the potential for losses is typically far greater than the quick returns you were looking for getting long at new highs. Practicing proper risk management at these times is crucial.

Who Gets Hurt More?

Weak money. When smaller traders start buying into melt-ups, they’re always the first ones to lose when the market turns. It’s your responsibility, as a trader, to recognize when market conditions are changing. 

The easiest way to recognize potential changes is to look at the market in longer timeframes. Institutional traders and investors aren’t looking at five-minute charts as much as you are. So, take a step back and expand your view of the market.

Markets do get overextended, so don’t be surprised by the pullbacks. Trade Well!