Reflecting on Recent High Volatility
Reviewing Your Trading Approach in Unusual Market Conditions
Unless you’ve been in a cave, you can’t help but notice that markets got super spicy recently…
High volatility across the board… Pretty much every asset was making serious moves.
Now things have calmed down a bit, it’s a great time to review your performance and your approach in these wild conditions.
So, the first thing is to audit how you approached the conditions in general.
What do I mean?
Well, when you saw the ranges expand and vol spike, what was your reaction?
- Did you get sucked into the moves driven by FOMO?
- Did you put together a game plan?
- Or did you decide to step aside and watch?
Let’s look at 1 first…
High volatility does not always equal high profits.
It can, but you need a game plan.
If seeing large moves and swings makes you feel FOMO and rushes you into a trade, you need to be careful.
We all know that game doesn’t end well…
Many traders will have blown up over the last few weeks… Not because they took a losing trade or two, but because they didn’t appreciate the increased risk and operated with no real plan.
Make sure that’s not you next time around.
The key to navigating high volatility is to pause, and take some time to consider your strategy.
An army general doesn’t arrive at a battlefield and just send his troops in right away.
Assess the situation, and come up with a plan.
So, first of all…
Do you even want to get involved?
Maybe you want to sit this one out, for many traders that’s exactly the right thing to do.
The conditions are unusual, perhaps you don’t have edge, and you don’t want to get involved when volatility is so high.
If that’s the case then decide when you WILL allow yourself to get involved again.
IE: After 3 days, or when the daily range decreases to 50%.
You get the idea. No trade, but these are the conditions I need to see to get back involved.
Ok, but what about if you do want to trade?
Firstly consider your risk allocation.
Do you want to swing big or do you want to take it steady and reduce your size?
Your answer is going to depend on experience, skill set, edge, etc.
Secondly, what’s the biggest play going to be?
- Scalping the ranges
- Looking for the big bounce
- Fading rallies
Which market(s) and why?
You get the idea.
Formulate a plan of action.
Things change, the market shifts rhythm, but preparing as much as you can will help guide your trades and prevent you from diving into every little oscillation.
(I know a trader who was so focused on sizing up to capitalise on the high vol that they didn’t really formulate a decent plan. He ended up taking a big hit on what was a decent opportunity for a trader with his experience and capitalisation, so it’s crucial to come up with a complete roadmap.)
These recent unusual conditions create an opportunity to reflect and review.
Whether that’s from a capital preservation perspective or a profit maximisation.
It doesn’t matter which, but next time it happens you want to be as prepared as possible.
Because you want to become the best trader you can be.