From Craig Cobb at Trade with Precision:

20150826 twp

With the mayhem in the markets this week, especially in global index markets, there was a temptation to join the selling as the possibility of massive gains was almost too strong to resist! Giving in to this temptation is however impulse trading, or in this case: impulse selling. I often hear people talking about trading like it is as simple as just sell and away you go, you will make a fortune. Often this is the misconception about a crashing market and I want to shed some light on this in today’s blog.

With the events of the past 5 or so trading days there certainly has been opportunities to do very well with exceptional moves taking place. Did the market just fall in a straight line though? Just because there are massive falls in price, it doesn’t guarantee that one will profit from it. I have seen many fortunes made over days like the past week but I have seen more fortunes lost due to people thinking it is as simple as no stop loss, load up a big position and let it go. Margin calls happen a plenty during these times. Here are a few ways I trade these times of great volatility and ensure I keep my risk as low as possible.

  1. I don’t change the way I trade. I trade my strategies for a reason, they work, they are risk managed, structured and offer a solid understanding. Changing this during times of massive volatility could have disastrous consequences.
  2. I USE A STOP LOSS. I have heard more times than I care to say “Craig I have stopped using stop losses because I keep getting stopped out”. Well that’s exactly what they are designed for. If one keeps getting stopped out, often it’s not the stop’s fault. Having losing trades is part of the strategy and part of successful trading – what is important is minimising loses whilst allowing winning trades to run!
  3. With markets moving so fast often the time frames I usually trade don’t offer opportunities. For example there hasn’t been a single 4 hour chart setup on any of the markets I trade this past week. This is due to price being in free fall and not having enough time to pull back before the next downward move occurs. In other words these volatile markets tend to be fast. What I do is go to the lower time frames. I will target the index markets or FX markets with the tightest spreads and look to trade off 2, 3 or 5 minute time frames. I opt to use a reduced risk of say 0.25% per trade because this isn’t my normal domain so I keep the risk low. I use the same strategies on these time frames but lower the risk. Bear in mind that with big moves, like we have seen, a small trade can still turn into a big profit, my goal is to keep risk low.
  4. The way I set my targets in markets like these will vary depending on the trade, time and position of the market. When everything does look good for a big move I will look firstly to scale out to give myself a break even trade and then let it run for a bigger move. If I am going to be leaving my desk or going to sleep and I don’t wish to close the trade I will put in a far flung target and leave it. With 1,000 pip moves going on this can often result in a pleasant surprise in the morning!
  5. ‘Keep your cool’ Is a mantra I adopt as a big win can be followed by over confidence, over trading and looking for that rush you just felt after making a solid return off that big trade. II choose to Keep this in check as the big profit I just had might have been the biggest of the year so I hang on to it and wait patiently for the next top trade to set up. The same goes for any losing trades, if I find I have traded several times, got direction right eventually but have been stopped out regardless that frustration can build. This frustration is usually down to not been part of a massive move and not only feeling left out but ending up with a loss on the P&L. ‘Keep your cool’ and remember one good trade can erase it all. Be patient and don’t get irrational.

I hope you find these 5 simple rules helpful in navigating your way through the volatility in the coming weeks and beyond. It’s an exciting time to be a trader but to succeed one needs to do a lot more than just sell and count the money.

Happy trading.