Reducing risks in Volatile Market
We’ve been emphasizing since September 24 that stocks are no longer in a calm Up Trend. They are in what we call a “Volatile Market”. This means stocks are likely to have big rapid swings up (Bounce) and down (Drop). The overall typical direction of a Volatile Market is choppy sideway trading.
It is much easier to trade calm Up Trends. You enter and add to your long positions during the dips. You hold for a while and prices will rise up generally. You can be a bit sloppy in trade management and still be able to make a profit of some sort.
Volatile Market in contrast is very difficult to trade. The swings are sudden, fast and furious. They tend to be headline driven, but not in a predictable way. Sometimes it’s buy-the-news. Sometimes it’s sell-the-news. There’s no easy way to predict which scenario it will be. During May, August and since mid-September this year, you have had a taste of trading in Volatile Market. It’s not easy.
Therefore, in this type of trading environment, it is very important to manage your positions and find ways to reduce risks.
The goal of trading is not to prove that you are right.
The goal of trading is to make money.
Last week, we shared with you some of our very specific rules for entries and exits in Volatile Markets. We urge you to re-read them.
These rules are our mechanism to filter out low-probability trades. They ensure that when we do enter a trade, we increase the odds of making profit from the trade, because we are only entering high-probability trades.
These rules also keep us from overtrading. Volatile Market can tempt traders into overtrading. This is the number one reason why casual traders lose money in Volatile Market.
When you feel the urge to trade in this environment, think about this quote from Jim Rogers who is one of the few trading wizards of our time.
I just wait until there is money lying in the corner, and all I have to do is go over there andpick it up. I do nothing in the meantime.
– Jim Rogers
If you can practice the same mindset as Jim Rogers, you can increase your chance of making money in this market. Wait for the easy and obvious trades.
The other philosophy you should practice in Volatile Market is this.
Take the money and run.
Use our trading rules to lock in your profits. Do not try to ride every swing trade end to end. You will most likely encounter some sudden nasty reversals and end up losing not just your profit, but your capital as well.
The rest of this article covers:
Table of support and resistance levels
Updates from market internals
Planning your trades
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