Trading in a volatile environment creates doubt and unease in the marketplace. There are so many unknowns. We have a long bull market that is probably closer to the end than the beginning, a hawkish Fed that will continue raising rates, $22 trillion in debt, deficits as far as the eye can see and new trade war fears that seem to come and go with each passing hour.
Never mind that we have a strong economy, solid earnings growth and still very low interest rates. The uncertainty weighs heavily on our shoulders.
How to trade a volatile environment
A few simple rules will put the control back in your hands.
Rely on your instincts
I gather evidence before I trade/invest to ensure the odds are in my favor. But sometimes, I must rely on my instincts, which are often right and save me from making huge errors.
Case in point: Back in September, something did not feel right for me. Some indicators were flashing red signals (the new high/new low list, breadth and volume). The market was in distribution. But I did not act quickly enough. I was leaning too hard in one direction, looking for more trade opportunities.
When the market plunged more than 800 points on October 10, I felt like I was losing control. The trading environment had had changed, and I needed to act.
Practice good risk management
I looked at my portfolios and determined I had too much risk on and not enough protection. I took steps to fix this by selling some names and adding market puts, even if they were elevated. I raised plenty of cash, too, since the next opportunity is often just around the corner.
These small actions gave me more control. If I missed out on some short-term profits, then so be it. I am in it for the long haul. During volatile times, it is easy to over-trade, make mistakes (and force trades to make up for those mistakes) and lose a lot of money. Eventually the tide will swing the other way. I want to be ready for it.
To that end, think hard about the environment we are in and ask yourself if you have let the volatile environment take control of your account. If so, then make some changes (shed names, buy puts) to regain the power.