🎓 TRADER PSYCHOLOGY

How To Trade Volatile Markets

Stock markets go crazy at least once a year. Having lived through more than a few episodes of volatility here are some lessons on how to trade volatile markets.

First and foremost crazy 🎢 markets are not at all like the ones you see in those YouTube videos that promise to teach you how to make a million dollars from a $500 account.  Price action does not move smoothly from one level to another. Crazy markets are more like the famous Mike Tyson quote, “Everyone has a plan until they get 🥊 punched in the face.” 

If you are trading leveraged products it’s totally possible to lose half your account in a matter of minutes during fast markets which is why lesson #1 is to reduce your size to one. 

That’s right to survive volatility the first order of business is cut the size of your trade to the smallest possible increment for that market. It may seem ridiculous to trade just one micro contract but it is the single best decision you will ever make.

Certainly, there are some among us, who are so talented, so focused, so disciplined that sizing UP during a volatility storm allows them to generate outsized profits. You are most likely not one of those people. We all think that we are the next George Soros when in reality we are all George Costanza. 

We panic, we freeze up, we flip from one side to the other getting whipsawed, and unless we do this at a micro size of one the account will be margin called by the afternoon.

Lesson #2. Stops and targets have to widen. Here is a rough rule of thumb that doesn’t require a quant degree - widen your stops and targets by .5 for every 1% move beyond the basic daily range. The basic, average daily range in the stock market is 1%.  If the market trades up or down by 5% then your stops and targets need to widen out by a factor of 2.5. It’s not a perfect solution, but like duct tape, it will get the job done most of the time. 

Lesson #3, turn OFF your algos.  Very few retail algos are programmed to instantly adapt to the jumps in volatility so that even if they pick the direction right they will all be stopped out on the retrace. There is nothing quite like having an algo stop you out five times in a row on trades that should have all made money. It’s truly special torture that only crazy markets can deliver. Crazy markets turn a relatively genteel sport into an HFT pinball game and the irony is that when machines take over the market completely, the algos need to be turned off.

Crazy markets are not a time to show off to the world how great you are. The glory is brief, the triumph is fleeting and you will have a much deeper sense of satisfaction if you just manage to come out of the battle unscathed.