My Top Tips for Trading a Choppy Market
The past several weeks have seen some unprecedented moves in both stock indices and cryptocurrencies.
This type of environment can be very difficult to trade.
The past several weeks have shown us several big up days and down days in the same week.
Although a single day or week of volatility doesn’t mean you should change your entire strategy, below are three trading strategy adjustments to make in a period of rising volatility:
Choppy Market Tip #1: Get a New Stop Selection Strategy
With higher volatility comes larger price swings.
If you’re using stop losses that are too tight for the current volatility, you risk getting stopped out of every trade before it has a chance to work for you.
Loosen your stops to give your trades a little more breathing room.
Choppy Market Tip #2: Trade “Safer” Stocks
Remember, volatility is your friend, not your enemy.
Stocks that you might never consider trading in “normal” market conditions could present good trading opportunities in a volatile markets.
When the broader market is going through large swings, look for instructional order flow or technical setups in otherwise “boring” names.
Keep these typically slower moving stocks in mind when the broader market is volatile.
Choppy Market Tip #3: Adjust Your Options Strategy
Implied volatility is one of the key inputs to an equity options price. When the broader market is volatile, we expect volatility to continue to rise.
This causes options prices in indices and individual equities to increase.
This makes it easy to overpay for an option premium or lose it altogether. That’s because the premium built into these options can disappear quickly as stability returns to the market.
Think about it like this…
If you’re looking for homeowner’s insurance in the middle of a hurricane, it will be expensive.
If you’re looking for the same policy when there is no storm expected, it will be cheaper.
Options work the same way, so avoid overpaying for options in a volatile market.
Trade Through the Chop
While this isn’t a complete list of tips for trading through high volatility, it’s a good place to start.
The bottom line?
Know how changing market conditions will affect your trading plan, and then adjust your plan accordingly.
Volatility will come and go but as we have said above, you should be welcoming it. Volatility creates opportunities for trade setups that might not have been there otherwise. You shouldn’t be afraid of volatility.
Make the necessary adjustments to your trading plan when the market is in a phase like the one we’ve seen over the past month and you’ll be much more prepared to weather the storm.
There’s nothing wrong with trading a little less with these conditions, but you shouldn’t stay out of the game altogether. Continue to participate in the market, just do so with more caution.
AKA, “The Alpha Shark”