Remember when volume and volatility were almost non-existent, and so, too, were quality trading opportunities? Well, surely you do, since that was only about ten or so trading days ago! It’s actually quite shocking that right from the dreaded “Summer Doldrums” have emerged some of the most volatile markets seen since crisis years…so how are you adjusting to them?
For trend traders especially, volatile markets can be tough, because you’ll get the kind of choppy and unpredictable moves that are practically impossible to anticipate in advance, and way too dangerous to chase after once in progress. Without question, though, this resurgent volatility does bring a renewed excitement to the markets, so as you set your sights on trading once again, consider these select adjustments, each one designed to promote more safety and trading success in such volatile markets.
For traders who had been stifled by the markets of late, this may feel like a renaissance of sorts, and once they see some movement on the charts, many can’t wait to jump back in and “make up for lost time.” Now I love that kind of enthusiasm—and I’m excited to seek out new opportunities, too—but remember that volatile markets like these are no time to take chances, trade unfamiliar or unproven set-ups, or be unusually aggressive.
These are not especially rational times, so you want to protect your assets and book at least partial profits early on so you’re well-capitalized once all the knee-jerk buying and selling dissipates, true momentum is restored, and the highest-quality trend moves may emerge. In the meantime, in such volatile markets…
Consider trading half positions: Cut position size down to 1% or even just .5% of total account capital in order to gain exposure while taking less monetary risk. You’ll ultimately save in the event that you require multiple attempts at a successful entry, a fate that is particularly likely when trading volatile markets.
Beware conflicting signals: Don’t be surprised to see fewer confirmation signals flashing in your favor, whether it’s indicators like the Stochastic, or even correlations across other equity and currency markets, many of which have recently failed or even been reversed. In volatile markets, it can actually be harder to find set-ups that have a confluence of factors in agreement, and if your strategy requires that confirmation, well then…
Don’t force trades: Whether craving the money and excitement, or due to expectations that traders thrive on volatility, or because a set-up meets “some” or “most” of your qualifications, don’t force trades in volatile markets, or any markets for that matter. As we’ve seen just recently, market conditions are ever-changing, but the need for discipline in trading remains constant!
Emotions run high in volatile markets, and if you’ve seen the sheer size and scope of the intraday price action, the sharpness and severity of the moves, and even the news headlines and daily coverage from the financial media, then you know that’s more than an opinion, it’s a fact. For traders, though, it’s not always about blocking or eliminating emotion, but instead understanding how it impacts you and the way you tend to behave when trading in volatile markets. A couple of the more common pitfalls may include:
Fear of missing out: Again, it’s because of expectations that all traders love and thrive in volatile markets that many think that anytime volatility spikes like this, that it’s “showtime” and high season for active trading! That will cause them to overtrade in volatile markets, take set-ups that don’t truly qualify, or even just trade more “on edge” or high alert during these times. If this sounds like you, identify that this may be your tendency, and then strive to stay grounded and trade volatile markets with the same focus and clarity you’d bring to most any other market session.
Recency bias: Sometimes even high-quality trade set-ups are no match for irrational, volatile markets. However, a not-so-funny thing can happen to traders once that seemingly “perfect” trade doesn’t work out: They become fearful or downright unwilling to take the next one. That’s an example of “recency bias” at work whenever the results of the last trade begin to influence the current one, and it can be a real problem anytime, but especially in volatile markets. So even after a good trade goes bad, ask yourself, “Do you have the poise and confidence needed to take the next one?”
Many traders naturally subscribe to the idea that volatile markets are their friend, almost like the proverbial bank is open and the money’s just there for the taking! But sometimes lost in all that excitement is the fact that while volatile markets do spur more (potentially) tradable price action, it also increases risk.
More realistically, volatile markets can give traders plenty of trouble, and learning how to adapt for more safety and success when volatility does surge—as it has just recently—can be a significant milestone in any trader’s career. So take steps to pare down risk, avoid fear and common biases, and trade on a proper path without suffering any difficult lessons in these suddenly volatile markets.