Mastering Volatility

Market volatility has tripled over the last few months, which poses technical and psychological challenges.

In this video I point out 8 ways in which you can master volatility and make it work for you rather than against you.

Increased volatility increases risk, so during such periods our primary job is to reduce risk to manageable proportions. Mastering volatility with trader psychology means one is able to stay relaxed in the eye of the storm so we can profit from the volatility.

Here’s the 8 Ways in text form:
1. As a trader myself, I want an objective measure of volatility. For that I don’t use the VIX, I use the Average True Range.

2. Decrease position size proportionally to the increase in volatility. If volatility has doubled, then consider reducing your size by 50%. If you do this, you will find it’s much easier to maintain evenmindedness.

3. Use wider initial and trailing stops. Volatile markets have higher levels of noise. This way your stops don’t work against you. With smaller trade size the wider stop should be emotionally tolerable. Make sure that’s the case.

4. Increase your targets, expect overshoot but don’t swing for the fences. Volatile markets move faster and further than usual. When a trade is working make sure you don’t choke it off prematurely.

5. Volatile markets will experience stunningly fast movements, which may tempt you to chase. To help avoid that temptation, pay less attention to the details of price action. Practice acceptance when you miss out.

6. Monitor your emotional state. Avoid a power struggle with Mr. Market. Humility is more profitable than ego.

7. We can expend a great deal of mental energy trading in volatile markets. To avoid burn out, trade less than normal in terms of screen-time and number of trades. And, if you have the opportunity, quit while you’re ahead.

8. Focus more on safety and less on returns. Take losses while they are small. Set and respect a daily loss limit of less than 2% of your account.

I love helping aspiring traders get profitable and helping professionals sharpen their edge. Jeffrey is a private fund manager and here’s what he had to say.

“Dr. Reid’s work is the difference between me going through the motions and making money. Under his direction I have been able to be more consistent and less emotional in my trading. I recommend his work without hesitation or reservation. He is without doubt one of the most impactful people I have ever met.”
– Jeffrey Moormeier, Quantum-Advisor

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