Top 3 Tips for Trading Volatile markets
The sudden volatility we’ve seen in global stock markets in 2018 contrasts to the low volatility that factored during 2017.
Many traders were caught out expecting only shallow price dips.
Instead we saw 100+ point drops and wild intraday swings on the S&P 500.
Day traders state they love this type of volatility. Yet in my 18 years in this business, I have yet to meet a day trader who is consistently making profits.
So, is trading extreme volatility worth the effort and stress?
Putting a small minority of successful experienced traders to one side, my answer is NO!
Here are 3 quick tips to keep in mind when markets turn volatile:
TIP No 1: Consider staying in cash or look at reducing exposure
Take a look at your risk profile and your psychological profile. Ask yourself: are you and your strategies made for volatile market conditions?
Very few people are.
Staying in cash and doing less is a strategy within itself. Volatility won’t last forever. When markets return to a ‘normal’ state you will be financially and mentally ready with your trading capital intact.
TIP No 2: Look for other markets to trade that offer lower volatility trends
Many years ago I added futures markets to my trading toolbox. Futures kept me active as a trader during times when mainstream markets had reverted to extreme volatility. Or when markets were trading sideways for months on end which was boring and unproductive.
There is a learning curve to trading futures markets. Yet the market analysis is the same. Price action on a chart is either going up, down or sideways. Correct position sizing and rigid risk management kept me in the game.
TIP No 3: Be wary of shorting
People have asked why I’m not shorting more in this negative environment. Firstly, shorting is different to trading long. The phrase ‘up via the escalator and down via the lift’ comes to mind. After locking in a major high the move lower usually takes everyone by surprise. The move tends to wipe out a massive amount of capitalisation before anyone has a chance to blink.
Take the S&P 500. In 3 trading sessions from 2nd February 2018 the S&P dropped 215 points before reversing more than 130 points in 2 days. It then dropped another 200 points in the following 3 sessions. Dizzying stuff!
As the market is moving so fast, most traders end up shorting when they should be buying and buying when they should be shorting. They get caught up in a tangled mess covering positions that are moving too fast for the average trader to successfully take advantage of.
I’m not saying never short sell but choose your battles wisely.
