How to Trade Stocks in Volatile Conditions like Now:
It seems that the last few weeks, one day the market is up and the next day it is down, reacting to positive or negative news stories generally concerning the looming “fiscal cliff.“ Many traders are feeling the anxiety that comes from the currents ups and downs of the market. This anxiety may even be causing some traders to consider stopping trading until a “better” market comes along or in other words until the market is more “calm”
The first thing to understand and remember is that there is NO such thing as a perfect market! The market isn’t really good or bad, it just IS. There is nothing we can do to change this. In fact, if the market didn’t go up and down we would not have any ETF trading opportunities. Certainly there are times, like the present, when the market is more uncertain than we would wish for. But, if we allow the market to get into our heads we can really find ourselves overly anxious and even discouraged to trade. Trader’s who tend to be preoccupied with catching only perfect trades, and never losing on a trade, end up being disappointed with themselves when they fail to meet these goals.
There is no doubt that during times of market uncertainty, these can lead to fear and anxiety over our trading style and methods. However, if we start to question our successful trading methods, you may start to question the sanity of trading altogether, and you may decide that it is better to sit on the sidelines and not trade at all. During uncertain times like we are in currently, tightening up our stops is a common reaction among newer traders, however more seasoned traders understand that tightening up our stops during more volatile times can be the worst thing we can do. In fact, doing so can almost guarantee that we will lose on the trade. The thought is; if we are going to lose anyway, we want to lose less that we would have under normal circumstances. This kind of defeatist attitude is allowing our fears to overcome logic and will lead to more unsuccessful outcomes. The only way to absolutely eliminate market risk is to stop trading, however this will also eliminate any opportunity to be successful and make any trading profits as well.
The only real way to reduce our risk is to reduce our EXPOSURE. The best way for a trader to reduce exposure in a volatile market is to reducing position size. Tightening our stops may reduce our potential exposure, but it also increases our probability of taking a loss. So if we are going to reduce our exposure by reducing our position size and we normally define our risk as 2% per trade, then we may want to consider reducing our exposure per trade to 1% or even .5% instead.
So, if we are feeling anxious or discouraged because of current market uncertainty, the best thing we can do is NOT to change our methods, but simply reduce our position size, therefore, reducing our exposure to the volatility. This will help us control the fear and anxiety that come from trading in times like we are currently experiencing.