Survival Guide in Unstable Markets
There is an expression, which has now become a cliche, that says:
"Trend is your friend." Another cliché also used in trading is "buy the rumor and sell the news." I don't want this article to be about clichés, but the point is to give the reader a psychological perspective on trading volatile markets.
What is market volatility?
Market volatility consists of larger than normal movements that create greater opportunities for profit and loss. Most traders I come across usually have a power struggle with the markets. They want to win all positions and, in times of high instability, this fight is widened. Here, I would like to leave some tips I learned from traders on how to trade in volatile markets.
Keep calm and continue
If you are a car racing enthusiast, you can compare volatile markets by watching a Formula 1 race. There is a lot of noise, excitement and adrenaline in the air. Everything is amplified during periods of instability. During these times, as a trader, one of the things that will help you is staying calm. A master trader once told me that by reducing the size of your position by up to half of what you would normally trade, you can better manage your risk. He also told me that: "Humility and acceptance that you do not control the market help manage risk rather than ego, pride and the fact that someone is making more money than you."
Position yourself and position your positions with cunning
Those who use stops or trailling stops are far more prudent than those who enter without exit plans or risk management. A general advice of successful traders is to put higher margins than you normally do. Speaking of number processing, one way to do this is to double the distance from your stop, although this doubles the risk. However, if you also reduce the volume of your position by half, you will be in your normal risk profile.
Capitalize on big price swings
It is not just about managing the risk of loss. There is also another side of the spectrum where profitability can be increased. When there are big price movements and you take the right risk measures, you can go there and enjoy them without being too greedy. Volatile markets tend to move faster and farther than normal markets, so if your trade is working, don't close it prematurely. One of the strategies that some traders use is to close one part of the position to secure profits and let the other part of the position run as far as it can.
Create a solid trading strategy
Another feature of a volatile market is that it changes direction very quickly. For this reason, the acceptance of "fear" and "greed" is vital. The moment you start chasing the market is the moment you fall into the trap, and that's when everything falls apart. The trick is to accept it and react quickly. However, this is easier said than done. The real trick is to have a trading plan or trading strategy for volatile markets and stick to it. “Plan your Trade and Trade your Plan. Another cliché, but very well applied to this market condition.
Control risk in times of uncertainty
In the coming months, there will be periods of volatility and some periods of extreme instability.
I hope this article has given you some tips on how to manage your emotions, trading and strategies to trade effectively under these market conditions.
Best wishes! And remember, keep calm!