These days you have to keep in mind that this isn't the market we were dealing with 4 years ago, or even 4 months ago. Taking one look at the JPM G7 Implied Volatility Index will quickly let you know that things can change in an instant. Last week the Index peaked as currencies reached for extreme gains and losses in what proved to be a very short amount of time.
During times like these, some traders will simply stick to their guns, while others will adjust their style and methods to conform with the current market. Little forecasting is required to know when things go beyond a certain level of normalcy. Reacting to these events demands good common sense and action based on simple, global principles, which ironically enough, are disregarded by some of the most complicated trading methods and algorithms in existence.
Your trading style should be “simply complex”, meaning simple while requiring a minimal level of complexity, but not too much. It allows you to adapt and adjust to all environments without binding you in to a rigid set of rules. Most poor trading systems go bust from this point alone.
1. Adjust your position sizing
Adjusting position sizing alongside volatility isn't exactly a new concept; in fact its widely practiced by a lot of major discretionary portfolios and quantitative models for the simple fact that former techniques simply don't work as well under extreme conditions.
And I speak as a first-hand witness. At the last hedge fund I worked for there were literally hundreds of models being used. The ones that adjusted themselves withstood the punches for the year and actually closed up quite nicely. The ones that didn't simply got hammered until it was too late, and essentially had to ‘start from scratch' after assuming loss on their portfolio value.
For individual traders, you'll find a lot of this is true as well. Whether a discretionary or quantitative tactic, when things swing so viciously, models tend to fall apart. These swings we have been seeing come with little warning and with a lot of ferocity. It's not a bad thing to ‘cool it' until the situation resumes a bit of normalcy.
2. Review your library of tactics
Traders are problem solvers, and when things tend to get wild that usually causes a problem for a systematic approach. Undoubtedly some tactics and setups hold up better in volatile markets than those that are less. Dig through your library of methods and see what might work best under such circumstances. Be selective, but not too selective; basic principles will still hold up (see item 5 below).
Also, be sure to write all of you experiences down, take plenty of screenshots so you have them for reference in the future.
3. Use more caution, but not too much
Your job as a trader is to assume a certain level of risk, though when tried and true methods appear to fall apart simply due to the nature of the market we're in you know it is time to take a breather. Be less liberal in your entries without sacrificing profit gained or lost on any positions.
As is the norm, take the easy ones, and don't do anything foolish in the meantime.
Widen your ranges and expect more overshoot than would be the norm. This could mean either modifying your entries or simply stops and take profits, but good money management will keep you afloat just fine.
4. Get on your toes; laziness tends to cause more problems than solve them
In recent days you have to think to yourself “now is not the time to get sloppy”. Go through ALL the appropriate motions for the day and don't skip a beat. Plan your day out, write everything down, read and constantly monitor all news events and be fully aware of all potential scenarios of underlying order flow on your charts by drawing lots and lots support and resistance. Do it all.
Some of you might be better than others at ‘doing your homework', but regardless of the size of your portfolio, traders big and small are all at some point guilty of letting things get loose. One of the biggest myths in the retail market that much of your daily motions are all so different than that which is done by institutional traders. We are all just human, and there is only so much information available out there, despite what many have been taught to believe. Stay on top of your game and your performance should remain consistent.
“Fatalism is a lazy man's way of accepting the inevitable” – Natalie Clifford Barney
5. Don't disregard basic principles
Not to be contrary to the 2nd item listed above, you have to keep mindful of the fact that basic principles will still hold up, even if they are witnessed at a larger daily price range than what you might be used to. Position sizing and variation of stop loss / take profit amounts could be adjusted, but it is up to you to decide what those values should be based on major price targets.
Spikes leading into areas of high order flow, whether continuous with a trend or against it, identification of key areas, price patterns, trendlines, etc., are no likely to instantaneously go bust in this market than in any other. How long they hold after-the-fact typically will, however. You'll notice a lot of “V” tops and bottoms occurring as opposed to consolidated price action due to the racing activity, but the areas, or levels, will remain the same.
If anyone has any other tips please post them below we look forward to hearing them.