I'm going to share a quick pro trading secret with you today. Don't worry - I won't get kicked out of the elite traders' club for sharing it, but you'll definitely impress your friends if they get a look at your account balance.
The Chicago Board Options Exchange Volatility Index, the VIX, has been pretty hot this year, running anywhere from 12.1 to 25.4. It didn't dip below 15 for all of August. What's that tell you? That the market's moving more than usual! What I mean is that moving up, down, all around - it's enough to send most investors into a tailspin.
There's no reason to expect that turbulence to subside for the rest of the year. Geopolitics, seasonality, trade, the economy, and even the president's Twitter feed will keep the VIX action hot.
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In other words, strap yourself in - because it's going to be a volatile three months to round out the year. Above all, don't be scared. Remember my Eighth Commandment of Trading: "Volatility is a trader's best friend."
That's right; as traders, we need volatility because a market that's moving means a market full of opportunities.
So that you're better able to capture every single one of those chances, I'm going to show you a tweak pro traders use when markets get chaotic.
It'll take you about four seconds to get the hang of this - and even less time to see how powerful it is. You can start using it immediately to spot chances and rake in profits at a time when, typically, slower traders are giving their profits back to Wall Street.
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It's All About Changing Your Trading "Triggers"
If you've been trading stocks for any length of time, you've at least heard of the 50- and 200-day simple moving average - or maybe you've seen charts with the "MA50" and "MA200," as we call 'em.
You get the average with simple arithmetic, or a calculator if you're not a "numbers" person. You look at the last 50 or 200 closing prices of a stock and divide by 50 or 200, and there you go: the simple moving average.
They're great for quickly identifying and measuring short-term (50) and long-term (200) trends. If a stock trades above its MA50, it's a short-term bullish sign; below the MA50, a more bearish bias is smart. The same holds true for the MA200, but with a long-term outlook.
Pro traders use these averages as buy or sell signals, too. If the stock's spent any significant time below its MA200 and it's not meeting your profit goals or expectations, drop it like a bad habit. If you're in a short-term time frame on your trade, the MA50 can tell you that, too.
I like my trades to go "FAR" - Fast, Accurate, and in the Right direction. Without these signals, you could make a mistimed, inaccurate, flat-out wrong moves. That's down to market psychology; investors and traders are people, hardwired to get freaked out by dips.
So it pays to know whether the dip is indicative of a long-term trend or... just a dip.
Now, here's where my tweak comes in.
You just play with the time frame a little bit and adjust your tempo. My time-tested approach is as simple as speeding up to the market. I start using the MA20 to replace the MA50 and then the MA 50 to replace the MA 200.
Now the MA 20, a faster-moving trend, catches the rips and dips that a volatile market can throw your way, and the MA 50 still acts as the trend indicator.
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We don't need (or aren't as concerned with) the MA200 as we're less worried about long-term trends; remember, we're talking about choppy markets here with lots of noise and little trend.
This'll help you move in and out of trades much faster. Your profits will be a little smaller, but you'll have more opportunities to take them, and importantly, you'll be ahead of the rest of the market.
Let's compare two charts of the SPDR S&P Homebuilders ETF (NYSEArca: XHB). One has the classic MA50, while the other includes the MA20.
Just look at the huge swings that appear when you factor in the MA20 that shifts from bearish to bullish. Every single one of those hills and valleys is a chance to make big profits - the folks who aren't trading on the MA20 are missing out on 'em altogether.
My "trend multiplier" finds these automatically, so I have that many more trading research recommendations to pass along to my Night Trader subscribers, but using the MA20 in your stock charts can really improve your trading when markets get "interesting" while everyone else sits around on their hands worrying.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.