**Note: I want to make clear that when I use descriptors such as interesting, best, or exciting in this article that I am not referring to the overall COVID-19 situation and certainly not to the crisis and terrible loss of life that is occurring currently. My heart goes out to all of those who are struggling right now, whether that be physically, financially, mentally, emotionally and to those that have lost loved ones to this disease. I do not personally view any of this as exciting, but I know that there are many who view the financial markets in that way at the moment.
There's no doubt that we're living in some interesting times as far as trading and the markets are concerned. I and a couple of traders that I know have had some of the best trading weeks of our lives. Then there are the countless others that have lost incredible amounts of money and many that have blown their entire account.
Times like these show you who has the ability to remain flexible and adapt their trading systems. Also, who is truly self aware enough to know their limits, weaknesses and strengths in their trading.
So, how do you approach these uncertain times? What should you keep in mind when it comes to the markets and placing trades? Here are some of my thoughts and a few things I have noticed over these past few weeks.
FOMO (fear of missing out) is rampant right now. It’s easy to get caught up in all the moves that are happening in the markets right now. Especially when every other person on the internet seems to have an opinion about whether we’re bullish or bearish or if we’ve hit THE BOTTOM or they’re absolutely positively sure about this once in a lifetime trading opportunity, etc etc.
I personally know of people who have been so convinced that they had to take advantage of this time and lost their entire account in the process. Some of these people were trading with money they couldn’t afford to lose and one even withdrew money from their retirement account and LOST IT ALL via trading.
It’s true, there have been many amazing trading opportunities recently, if you know where to look. But guess what, that means that there have been just as many if not more opportunities for huge losses. Don’t be a gambler. You’re not going to change your life with one trade and that shouldn’t be your goal. Succeeding at trading is a long term game where protecting your capital is #1.
Which leads me to my next point.
It’s OK to Sit Back and Watch
One characteristic shared by the greatest traders is that they know when to sit on the sidelines. They know that more trading does not equal more profits. For me personally, my trading really took off when I moved to higher timeframes and drastically lowered my time spent in front of the charts.
This is more true now than ever. There is a saying that I love that says “When in doubt, stay out.” There is absolutely nothing wrong with sitting out during these crazy volatile and uncertain times. Strategies that normally work well are going haywire and levels that would normally hold are simply getting blown through.
Many of us, myself included, have never traded through events like these. Hopefully your backtesting covered previous market meltdowns, but you also have your psychology to account for. If you aren’t absolutely 110% sure that you can trade your system as intended right now and handle the volatility mentally, it’s better to sit back and protect your mental, emotional and financial capital. I’ve had quite a few days where I knew I wasn’t 100% and just stayed on the sidelines that day.
If you don’t have a plan, don’t even think about entering any trades, let alone right now.
You can also take some steps to scale back as you need to without completely removing yourself from the markets such as
- lowering your position sizing,
- only trading the strategies you’re most confident in,
- trading with less total capital,
- temporarily moving to demo trading
Feel free to do any or all of these until you’re more confident and things calm down a bit.
Volatility is at levels that some of us have never never seen before, at least not from the position of *trader*. As I write this the VIX is at 46.8, which is actually down 45% from where it peaked just 2 weeks ago.
We haven’t seen levels like this since the Financial Crisis of 2008-2009.
You might think “Yay! This means more trading opportunities!” Perhaps. But here are some things to keep in mind if you’re going to be trading right now:
- The market could swing widely at times, with you or against you.
- There is a lot more news coming out at the moment which is affecting the markets. Be aware of what is going on.
- Spreads are much wider than usual at times. Plan accordingly with your entries and exits.
- You should be lowering your position sizing (yes I might sound like a broken record here, but it’s that important).
- Depending on your trading timeframes, it’s likely that you’ll be stopped out more than normal thanks to a combination of #1 and #3.
- You may need to adjust your stops to account for this.
- Don’t try to “make it big”. You will be humbled.
Practicing proper risk management and utilizing an effective position sizing strategy are more important now than ever. When we finally come out on the other side of this, I’m firmly convinced that this will be one of the main factors separating those that see their trading accounts survive or grow vs those who lose money and blow their accounts.
You should be using a position sizing strategy that takes volatility into account. I use the 7 period ATR to assist me in this. I combined this with a percentage based risk approach. So in the end I am never risking more than the percentage I chose (let’s say 1%) if the trade goes more than 1 ATR against me. I’ll go more in depth on this in the future (maybe in a video), but I can say this has worked very well for me.
However you figure out your position sizing, make sure you are trading smaller positions during this time to protect yourself against the large moves that can happen. Don’t be a hero.
As I mentioned earlier, there are many people who are absolutely convinced they know what the market is going to be doing. They are fools.
The only thing any of us should be certain of is that we don’t know what the heck is going to happen. There are simply too many unknowns when it comes to the virus.
As time goes on we will learn more and begin to see if our attempts at social distancing are working (and how well). We will get a better idea of what to expect on the vaccine front as well. It still remains to be seen how seasonality affects the spread and we are already seeing secondary spikes in cases in places that thought they had the situation under control.
Until some of these unknowns become more clear, we are going to continue to experience rocky market conditions. Plan and act accordingly. We could be dealing with this for a while yet.
Knowing Your Limits
At the start of this article I mentioned self-awareness and I want to circle back to that. In the end, this single factor will separate you from the 99% who lose and the 1% who make become consistently profitable traders.
Everyday, even during more “normal” times, I take inventory on myself and my mindset. If my psychology is not in the right place that day, I don’t trade. No exceptions.
It doesn’t matter how perfect the markets are or how many trading opportunities are in front of me. It doesn’t matter if I’ve done everything right as far as my prep and review and feel totally prepared otherwise.
The state of our world right now is unprecedented. Everyone is going to handle that differently. So many things have changed in our lives, maybe in ways that we don’t even fully realize.
Many people are unable to work, some have loved ones that are ill or may be ill themselves. These are huge changes that you will need to account for in your trading, but there are also smaller ones that may be effecting you too. Perhaps you have kids running around while you’re trying to trade. Maybe you are unable to go to the gym as you normally would. Your overall level of stress and worry might be higher from the news and suffering of others.
Please don’t underestimate the effect of these changes on your psychology. I encourage you to check in with yourself frequently and prioritize self care right now. If you aren’t already meditating or practicing some other form of self-reflection, you should do so now. I’ve used the Headspace app for many years now and find it very helpful. Keeping a trade journal is key and can help you keep track of how your mindset is affecting your trading (I use Edgewonk for this).
In the end, it’s ok to not trade right now. You can also take a day off or scale back in whatever ways you need to if you know you’re mind isn’t right. The markets will be there when you are ready to come back.
I hope you found some of this helpful. We’re all in this together and will make it through if we can be there for each other.
Please stay home if you can and practice social distancing. WASH YOUR HANDS. Check in on your family and friends via phone or video chat.
If you can, donate to entities that need help right now and consider sewing masks, ordering takeout from local restaurants, buying gift cards from local businesses or anything else you can think of.
If you or someone in your family is fighting this from the front lines, stay safe and THANK YOU for your bravery!