Listen, I hate this market as much as anybody else.
On the surface it seems like an easy market to short, but when a market can rip off +100 point rallies in just two trading sessions, shorting and covering is just as difficult to squeeze out a profit as buying and selling is.
When the market is constantly rising and trending higher, stop-losses are a crowd favorite; they don’t get hit that much, and the gains the market is generating offsets those losses quite nicely. But when you get into a market with this kind of volatility which is rarely ever seen, the stop-losses really mean something. Yet it is during these times that they tend to become ignored and overlooked by traders. This is primarily as a result of believing that once stopped out the stock you once were in will rally back and make you look like a fool.
And perhaps so!
But as a trader you still have a responsibility (assuming you desire to be profitable long-term) to follow those stops and not let the fear of being made foolish force you into a trade that has no end in sight.
I’ve been stopped out of plenty of stocks this year. That comes with the territory of trading. If you aren’t getting stopped out, you are not trading with any form of discipline. PERIOD.
Stops will get hit and it is your responsibility to take them when they do. In the current market you cannot afford to ignore your stop-losses.
And ignore anyone that tells you that you should be widening your stop-losses to account for volatility. That has to be the WORST advice for a trader. Basically they are saying, in volatile markets allow for more volatility so ultimately you can take bigger losses. The difference between a 2% stop-loss that you might typically use, and a 10% stop-loss is 8-freakin’-percent! Don’t widen your stop-losses because you will only create a bigger hole for you to dig out of.
So how do you trade this market?
You have to recognize that the overnight gaps are 80% of the time unable to be predicted currently. We are now heading into a three-day weekend where the Chinese market will have traded for two days while coming off of a holiday weekend of their own where they will be digesting three days of volatile trading in the US from when they were closed. Should we expect a crazy open for us on Tuesday? YES! Do any of us have a clue in which direction? NO!
Unless the market provides us clues as to the direction it plans on taking and can provide you with an edge to trade from the following day, then I would limit current trades to day-trades. My rule of thumb of late has been in this current market to make all trades as day-trades, unless proven otherwise. If I am going going into the next day of trading with a loss at or near my stop-loss, the best way to play that is to simply sell the position before the close. If I have some solid gains to play with, then I am either booking those gains right away, which I have done plenty of times of late, or I will hold overnight with a tightened stop-loss.
Your main objective in this market is not to hit major home runs on your trades instead it is to preserve the capital that you have and to only take setups when they present a clear opportunity to profit from, but most importantly an easy way to manage the risk tightly should the trade go against you.
Then when it comes to the end of the trading day, ask yourself, “Do I hold an edge in this trade that justifies me holding this trade overnight?” If not then sell the position.
But when you make your decision, you have assume that +80% of the next day’s market action will take place overnight and whether a +40 move in the futures will have any catastrophic consequences to your portfolio should the market work against you the next day.
These are just a few of the simple tactics that you can take to mitigate the risk and navigate the financial market each day. I’d also encourage you to to sign up for a Free 7-Day Trial to the SharePlanner Splash Zone where I reside each and every day with a great community of traders who are eager to help and work with one another. Each day, I post my trades and trade ideas real-time as well as send them out via text and email alert.
You can receive Ryan’s trade alerts via Text and/or Email by subscribing to the Splash Zone.
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