7 Tips for Trading Volatile Markets

by | May 13, 2019

Stocks are getting crushed today as hopes for a trade deal dwindled over the weekend following some harsh comments from U.S. officials. And yes, President Trump had some things to say on twitter too…

(It’s now a news driven market, and in turn, become a traders market)

The market’s fear index, the VIX, is above 20, a sign that traders are beginning to act concerned.

Should you be?

No, not at all…

… because right now it’s become a traders market.

What does that mean?

It means that trading will be choppy, stocks will reverse faster, and react to major headlines (even if they are rumors).

That said, if you want to get involved in this market, then you want to look at more day trading opportunities. For example, if got long stocks on Friday, you were sitting pretty, but if you held onto those positions today, you’d be feeling some pain. In a news-driven market swing trading becomes difficult.

But you know what?

I love this kind of market. It’s especially great for catalyst plays. You see, during periods of panic and extreme volatility, some stocks get way oversold. I like to keep a list of these types of stocks because they are prime candidates for bounce backs when the news improves.


(Here’s a look at my catalyst portfolio YTD, if you’d like to start receiving my alerts, click here to find out more)

That said, I didn’t get to $6M+ in career trading profits before the age of 30 by not being opportunistic. However, if you want to take advantage of this volatility, and the chances this market is offering, you need to be prepared.

I’ve come up with a list of 7 adjustments (and action steps) you can take to improve your odds at being profitable during this heightened volatility period. Some of these steps might sound like common sense, but when you put them into action, you’ll be surprised how better your trading gets.


7 Adjustments to Make in Volatile Markets


With the SPDR S&P 500 ETF (SPY) down more than 2% this today… traders have been looking for spots to buy the dip. However, this isn’t really the time to get into any swing trades because it’s pretty risky to start buying at these levels… so I’m not doing anything on that front.

Now, for the most part… if you’re trying to play this volatility, it should be okay to day trade (if you have an account over $25K – if you don’t, make sure to check out Penny Pro Jeff Williams live webinar tomorrow at 8 PM ET).

When there’s heightened volatility, we need to make adjustments to our trading. For example, now really isn’t the time to max out your capital to buy this dip… or trading without a plan or stops.

That said, let’s take a look at some of the adjustments I’m making to adapt to this environment.


1) Trade Smaller


Now, a lot of beginners like to use sell-offs to average down on their positions. Basically, they bought stocks or options… lost a bit of money and are using the dip to buy more shares or options contracts to get a better cost basis.

However, when markets are volatile… it’s actually time to trade smaller.

You see, this market is being driven by trade war headlines… any negative headline could accelerate the selloff. If you’re trading bigger in relation to your account size, you’re exposing yourself to a lot of risks… and all it takes it one tweet or headline to cause you to lose more than you expected.

For the most part, if you keep your position sizing to less than 5% of your total capital, you can reduce your risk of ruin.

Moving on… when there’s heightened volatility, it seems like traders are committing one pitfall… trading without stops.


2) Use Stops


If you don’t know already, I use stops for all my positions in order to manage my losses. However, when the market is down a lot… traders tend to forgo stop losses. Rather than leaving their stop losses on… they’ll just “keep an eye on the market”… thinking their stocks will catch a bounce.

If you trade without stop losses when markets are crashing… you could easily lose more than expected.

Now, it’s pretty simple to make this adjustment: have a trading plan.

For the most part, all you need to do is have a thesis, and buy, profit and stop-loss zones.

For example, here’s a look at one trading plan.

Catalyst Swing Names (1-4 week holds) that I am watching

Cymabay Therapeutics (CBAY)

Catalyst Dates: Phase 2 data to be announced in 2Q (likely June)

Buy Zone: $12.50 to $13.00

Profit Zone: $14.00 or higher

Stop Zone: $12.00 or below

(If you want catalyst swing trade alerts in real time, click here to get started.)


3) Set Alerts If You Can’t Be By Your Screen


When the markets are selling off, it could create buying opportunities if you which prices you want to be buying around.

Now, I like to buy when a stock is around support (a price level where the stock has had a hard time breaking below).

For example, let’s say I wanted to day trade the market… I would look to buy it around a key level.

Here’s a look at the daily chart in SPY.

Now, you’ll notice a blue horizontal line in the chart above. That’s the $280 level in SPY, and it’s a key psychological level. Typically, psychological levels are around round numbers, like $280, $295 (the previous psychological level where SPY failed to break above).

So if I was looking to day trade SPY, I would set an alert just above $280 (say $280.50)… if SPY gets around there, I might look to buy around that level… and stop out somewhere below $280.

You can do this for any stock you’re watching using your trading platform… if it offers a mobile app, you’ll get your alerts right on your phone.


4) Hold for Bigger Gains


Keep in mind, since we’re trading smaller… you need bigger profits or larger moves. The key here is to play for points.

Now, many beginners fail to hold onto their winners and it boils down to letting their emotions dictate how they’re trading… or they simply don’t have a system or lack confidence in their trading plan.

In order to adapt to this market environment, I’m holding on for bigger gains because since stocks are more volatile… you can play for points instead of pennies.

So how am I going to hold on for bigger gains?

Again, I’m going to have my trading plan in place and stick to it. Now, once I reach my profit zone, I’ll look to take profits on a portion of my position. For example, if a stock reaches my target price… I might look to take profits on half of my position and let the rest ride.

Moving on.


5) Create A Watchlist of Your Favorite Names


Remember, selloffs could create some buying opportunities. Whether you like it or not, chances are the stocks you’re watching will be affected by market selloffs. For example, when the market is down over 2% like it was today… traders get panicky and end up selling their long positions in stocks… even though there may not have been any stock-specific catalysts.

That in mind, you might be able to buy your favorite stocks “cheap”.

Now, in order to do that, you’ll need to create a watchlist. For example, you might want to create a list of stocks that you like to trade and levels you want to buy around, as well as stop loss areas and profit zones. If you don’t know which stocks you like, you can always use Finviz to screen for stocks to potentially buy.

In addition to creating a watchlist, you’ll want to keep a closer eye on specific sectors.


6) Keep A Closer Eye on Sectors


Now, if you don’t know yet, there are some sectors that actually perform better when the market is selling off.

What that means is that they’re inversely correlated to the market. In other words, they move in the opposite direction of the market… when stocks are rising, these sectors are falling or just trading in a tight range. However, when the market is selling off, they tend to go up.

For example, if you look at bonds, they’re rising today.

Why’s that?

Well, bonds are considered a safe haven asset. That means when traders are taking risk off the table, they might look to bond exchange-traded funds (ETFs) like the iShares 20+ Year Treasury ETF (TLT) to hedge their portfolio. That said, if you know which sectors to buy when stocks are crashing… you could outperform the market.

So when the market is down big, look for sectors that are flat or up.

Right now, I’m keeping an eye on utilities and bonds for potential trades.

Now, for our last tip for this volatile market… find stocks with relative strength.


7) Monitor Stocks With Relative Strength


There are actually some stocks that are relatively strong in relation to the market… and you’ll want to keep those on the radar. You see, if these stocks are just flat or down slightly, while the market is down a lot… those stocks will probably be the first ones to move up when the market recovers.

Basically, when the market is down, look for stocks that are up… and you can build a watchlist from there. You don’t want to be looking for names to buy that are down with the market just because you think they can turn higher.

If you’d like to keep up with some of my trades and how I’m moving in this market, make sure to follow me on Twitter, Instagram, Facebook, and Youtube.


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