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Sigh… If I could wave a magic wand and make downside volatility disappear, I would. But I can't, so I won't.
What I can do is show you how to tweak your approach to trading in a market that has, frankly, come unhinged relative to the past 10 years or so.
Now, it's true the market has put around 10% in gains under its belt since the Christmas Eve rout, but I'd be remiss if I recommended we jump into the rally headfirst, with no regard for the risk. It may turn out to be the start of a big run higher… but I just can't trust it.
Downside risk is never far from a trader's mind these days, and I'm no exception.
While the three tips I'm going to share with you won't make volatility go away, what they will do is help you shore up your positions, making sure you pick more winners, cut your losers with confidence, and keep more of your money right where it belongs: squarely in your account.
Changing Up the Rules Will Make a Huge Difference
"It's a simple game…" said Skip from the classic baseball flick "Bull Durham." And he was right.
Of course, researching trades for my subscribers is far from a game to me, but the strategy of our approach is simple. Win more often than we lose, and limit our losses when we do lose.
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To do that, I'm "updating" the position management rules that served us well during the raging bull market.
Shorten holding periods: During the big bull, I was content to let positions in the red stick around for an average of 71 days; often they turned profitable. No more. In this market, the ideal holding period for a trade that's not immediately profitable is two, three weeks tops – even shorter in some cases.
Establish hard stops on positions: Looking at our past numbers, we've had several positions that have been in the hole, but have ended up coming back to post profits. Easy enough in an energetic bull market, but in a market like this, they're outliers. This is why I'm recommending hard stop-loss levels for every move I research for my subscribers. Do the same, and you won't go wrong.
Take winners off the table when they begin to weaken: This market has a funny way of turning winning positions into losers in a hurry. In a bull, you can afford to wait it out a bit to see if things turn around. Not now. This ties into "Rule No. 2" up above. Don't let weakness turn contagious – snuff it out.
Now, what do I expect from these changes? Well, as I mentioned, we can't stop volatility, but these measures will certainly step up to manage it. As for my subscribers, I expect these rule "tweaks" to increase our winning percentages and boost our return per trade well above their already market-crushing levels.
Taking this approach will result in an undeniable boost to your bottom line, too.
Beyond that, the takeaway is that you can turn any loss into an opportunity to learn from your mistakes – call it "tuition" for the School of Hard Knocks. If a loss yesterday can turn into a positive tomorrow, it'll have been worth the price.
Watch Me Set Up a Trade AFTER the Markets Close
Extreme conditions require unconventional methods… and my strategy is the epitome of extraordinary. It's so unconventional that I won't make a single move while the markets are open.
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About the Author
Chris Johnson is a quant - he's obsessed with building and perfecting mathematical models that allow him to predict, with startling accuracy, the direction of the markets, entire sectors, and individual securities. For the last year, he's been researching and building a new system that lets him move swiftly in and out of the hottest stocks in the market for life-changing gains - entirely on his own terms. The results of his newly-minted Night Trader system are nothing short of amazing.
Chris also contributes to Money Morning as the Quant Analysis Specialist.