“The Stock Market – it’s a CRAZY place, Pauli!”
This was a comment from a buddy of mine who started learning to trade the stock market at the same time as me and became my trading partner.
This was circa four and a half years ago and we were very new to the world of trading. Feeling that we “knew the rules” but were still getting “a whipping” when we were getting into trades.
“Stop losses too tight”, “locking in profit too early”, “not following the rules correctly”, “going against the trend”… these were all bad habits that we had managed to perfect and without any coaching or guidance, we didn’t know that it was the wrong thing to do – until we found out by trial and error.
Just as we started to go from “consistently losing” to “consistently being flat”, we got hit by the credit crunch.
All Hell broke loose in the stock market with all the stories of greed and doom that were coming out and being blamed on all the financers the world over.
The Stock Market went into melt down….
Well, that’s if you believe what the media have to tell you.
Banks were going bust and there was more talk of “blood in the streets” in New York and London than the war-torn streets of Baghdad at the time.
Today, with the goings on in Libya, the devastation that we have just seen in New Zealand and Japan, the heavy media focus on Gold and Silver, the markets have returned to a state of huge unpredictability.
There are double digit percentage moves on indices and money flowing to new areas for cover including the commodities as well as more “alternative investments” around the world.
I want to give you some insights into how best to approach these kinds of stock market conditions we are now seeing.
Firstly, volatility is not a bad thing – if you know how to trade it. If traded correctly, it can make you your profits a lot quicker. If you don’t know how to trade it, you can take a real heavy loss – which is obviously not what you want to do.
My biggest concern at the moment is really not what happens during the UK and US market times, it’s what is happening on the wholesale markets and international markets (such as Japan) when the UK and US are closed.
A 10% drop on the Japanese markets will then have a knock on effect on the open of the UK and US and pretty much everyone else too.
These market conditions make me much more hesitant to hold any swing positions (positions of more than 2 days). Really because of what can happen when the markets are closed over night.
Yes, it can go your way but even with a stop loss in place, we have very little security against any aggressive moves against us.
In saying that, this level of volatility can be a day traders dream come true and the kind of movements that we are seeing can make a savvy day trader hundred’s of points in a very short amount of time.
Also, please be aware that even when we are experiencing big bear markets (when the markets are dropping), there are very often opportunities to make money on the upside.
This may sound counter intuitive but only in heavy bear markets do we see big 400 / 500 point daily rallies. Very seldom to we see these kinds of rallies in a Bull Market.
As a matter of fact, the biggest trade I ever took was in Nov of 2008. You will recall that the markets were selling off pretty aggressively at the time but on the day in question; there was a 1000 point rally on the DOW Jones.
Of those 1000 points, I manage to lock in 657 points in about two and a half hours. Even at just £1 per point, that would work out to be a pretty good hourly rate of remuneration.
The best guidance I can give regarding trading this type of stock market condition…
Is that with anything but a day trading strategy, be VERY picky about what you trade. Make sure you have a very strong risk/reward ratio and be aware that you may want to be a little more liberal with your stop loss – but this again MUST be reflected in your potential upside.
If you are not in any trades right now and you feel unsettled by the current market behaviour, be prepared to sit out of the trades.
Sit in cash.
It is a very important part of the correct trading psychology to be able to refrain from trading when the market is so volatile.
As we know, the markets react very quickly to information that is presented to it and this level of volatility too, will pass and then the conditions will be better suited to taking swing positions.
So, in short:
• Don’t feel like you need to trade if the markets are making you feel uneasy
• Day trading strategies are safer right now than holding overnight positions.
• If you are going to trade swing positions, be even pickier about what you are trading.
• Remember that even in markets that are selling off aggressively, there can be very big up-days too.
• Be Patient
To your Health, Wealth and Happiness.
If you have any comments on how to trade the stock market in this situation, feel free to comment.