Psychology Staying in Control in Extremely Volatile Markets

As with any balanced force… ying and yang… pleasure and pain… etc., it’s OPPORTUNITY and DANGER that confronts the trader in extremely volatile times.

Since the purpose of a disciplined trader is to keep you mentally and emotionally strong in your trading, I thought I’d offer 4 ‘structural’ tips to stay focused to run your trading plan.

“Structural” tips are things that you can do mechanically in your trading to better keep you on the side of calm, cool and collected, as opposed to “inner mind” tips that you should be engaged in all the time anyway… training your subconscious mind to hold the values of a disciplined trader. Knowing you must win the BATTLE WITHIN YOURSELF first, before you can win with the markets.

OK, here are some structural tips from ME… a teacher and trader who has been trading for over 30 years and have navigated through 6 or 7 markets in that span as we are experiencing now.

TIP 1 AND TIP 2 - These two tips go together. Engage in fewer positions and widen your stops.

Highly volatile markets have a great tendency to run through stops, intra-day, and then continue in the dominant direction. Witness the 280 point rally in the Dow off the bottom which occurred about 2/3rds into the trading day last week. Many ‘profit protection’ stops were triggered in that reactionary move, taking out (with short profits, likely) all those who entered the day short… only to see big money left on the table as them market made new lows into the close and traded 300 lower in the evening session. It’s tough to get back in once you’re out. If you had a smaller position, you could give these wildly volatile markets more breathing room and you’d still be in. The Big question is always, when is a reactionary move really the start of a reversal? That’s for you and your trading plan to decide. Have this answer in place before you enter the trade. You may want to consider a special “volatile situation” section of your trading plan to guide you through times like we are seeing currently. By taking on fewer positions, and widening your stops to let the market gyrate, has, for me, proven to be a good strategy. I stay in control.

TIP 3 - DECIDE: Faster profits or Bigger Profits?

In highly volatile markets profits come (and go) quickly… sometimes within seconds. Also, volatile markets mostly result in big overall moves (big profit opportunities). I have found that if you trade to take advantage of both types of opportunities, you will not be successful. Why? Because trading for short term profits (intra-day) and trading for longer term profits (day to day in the case of highly volatile markets) rely on two different philosophies. You must choose. If you choose the quick-profit intra-day route, your greedy-mind may suggest that you ‘hold on’ just a bit longer to that ‘quick trade’ to take advantage of what you see a big wave down (or up) coming. That’s a mistake. Follow your plan… whichever it is… and don’t hop from one type of trading to another.

TIP 4 - If you have been trading for less than 3 years, consider standing aside.

It took me 3 ‘high-volatile-market’ experiences over my first 15 years of trading to finally come to grips with the fact that ‘everything will be ok’ when it’s over. In the period we are in RIGHT NOW, in the equities markets, your mind can hop from strong snap-back ideas to the end of the modern world as we know it. Whatever the ‘grand’ picture is, it won’t happen overnight. You’ll have time to adjust to a catastrophe… that’s what the best traders do… they adjust. A new trader, OR someone who keeps making the beginner's mistakes over and over again and never learns, should consider standing aside and ‘watching the show’, from a non-emotional standpoint. What you will learn about human nature (demonstrated by those who have money at risk) will serve you greatly when the next highly volatile situation occurs… and you’ll know ‘this, too, shall pass’ and you’ll enter with greater control. Standing aside IS taking a position… a neutral one… and often that’s the best place to be for a less experienced trader.

Finally, just remember the key is to always exercise mental discipline when applying these structural tips. A successful trader is in control of his/her emotions at all times and is not controlled by fear. Know that the market is a math game. It's an exercise in probability and statistics and you must keep the odds on your side, even if, from time to time, it hurts.

Norma Hallett can be contacted at The Disciplined Trader
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I agree from my experience also that if you are not overtrading at any one time you can afford to have wider stops and be more comfortable to be less anxious during a volatile market and go through the noise in the market, and wait for close to the desired trading plans result by staying disciplined.