We are witnessing a major trend change in all the major stock market indices in 2018. Last Friday, the Nasdaq actually went red on the year after the latest 2% intraday correction. Market corrections are inevitable, so you have to be prepared to adjust your strategy to these new market conditions. Volatile markets are when many people go bankrupt, but also when many traders make fortunes. In order to profit from volatility in the stock market you need to have sound trading rules that will make you money consistently and protect your account.
1. Don’t Fight Trends
We have seen some incredible intraday trends to both the long and short side the past couple months. If you are on the right side of the trend, you can get some great risk versus reward ratios on your trades if you know how to let your winners run. If you are caught on the wrong side of a trend, this is the worst time to be stubborn.
Stocks will consistently dump further than you think possible, and also have massive bounces that can squeeze you to the short side. If you don’t obey your stop loss, it is very easy to lose a huge portion of your account in a matter of hours. Remember that in trading it takes months and years to achieve success, but everything can be undone in a matter of hours if you are undisciplined.
2. Scale Out Into Strength/Weakness
No one really knows how far stocks will dump or bounce. In order to profit from volatility, you have to make quick decisions and cut losses quickly. In especially volatile market conditions like we are in right now, selling or covering a fraction of your position as it goes in your favor can be extremely useful. Stocks are trading well outside their average ranges, and for this reason you will want to leave some of your shares for the bigger move.
3. Sell Half Your Position And Move Stop To Breakeven
Once the stock is at a key resistance or support, you can sell or cover half of your shares. You can also move your stop to your buy price, and that way you are guaranteed to have a green trade no matter what, while still putting yourself in a position to capture a bigger move. In volatile markets like this, stocks can quickly reverse on you and can turn a green trade into a red one in a blink of an eye. Moving your stop to your entry will prevent you from wiping out your realized gains from the trade.
4. When In Doubt Stay On the Sidelines
If volatile markets are not where you thrive, stay on the sidelines. Cash is a position as well. If you are unfamiliar with market conditions like these and have no setups you can trust, don’t try to figure it out by risking your hard earned capital. One of the most important traits of successful traders is their ability to know when to stay on the sidelines when they know they have no edge in the markets. If you are having issues staying on the sidelines and losing money from boredom trades, check out this article to learn how to stop this destructive behavior.
5. Pay Close Attention To Sector ETFs
Always keep a close eye on the SPY and other sector ETF’s when you are trading an individual stock. Many of the tech stocks for example follow the trend of the QQQ closely. If you are short NVDA for example and the QQQ is starting to bounce, it is not a bad idea to take some profits in your NVDA trade.
6. Trade Only When There’s An Obvious Trend
Many traders make the mistake of trading stocks that are not trending. They then proceed to get chopped up from entering and exiting so much and flipping their position. The SPY will not dump 3% every day. Nothing goes straight up or straight down forever, so you have to understand when it is realistic to expect a stock to begin a strong trend, and where it is likely to end. If you have any doubt if there is a strong trend that you can participate in, it is likely not a high-quality trade. Therefore it is likely going to be a choppy trade without clean momentum, which will waste your mental and physical capital which you could be using for better quality opportunities.
7. Stop Blindly Buying Dips
It looks like there is a serious trend change in the overall market. For the past 9 or so years, we have been in a non-stop bull market. Every major correction (such as Brexit for example) was bought up quickly. But it seems like BTFD is not working anymore. For the first time in years, we are seeing clean continuation to the downside in the overall market. It is a big sign that we are seeing a major trend change, with an even bigger correction possibly looming. Trades to the long side will not be clean until the overall market starts to stabilize.
8. Use Margin Wisely
Margin can be either your best friend or your worst enemy. Using margin in volatile markets can destroy your trading account in a matter of hours if your trade risk is not proportionate to your account size. Use margin when you are adding to an already green position, versus adding to a losing position.
Free Live Training Session
Come join us on April 16th for a special webclass: "Secrets to Staying Green When the Market Goes Red". On this free live training, I will show exactly the setups I use to profit from volatility in bear markets.