Considering the past few weeks, with triple digit Dow point swings a daily occurrence, I thought this post on market volatility to be appropriate. The majority of traders see volatility as dangerous and something that should be avoided.
These traders equate volatility with risk, what they don’t realize is that they are two different things.Without volatility there would be no profits, you must have the market move to make money.
By singling out just one period of time when volatility is giving you losses, you will miss the big picture which over time, volatility is what makes you huge profits.
Let’s think about this example of volatility.
Let’s assume you open an account with $10,000 and the markets go on a tear and you pick some good winners and are up 30%. Your $10,000 is now worth $13,000
Then the market reverses and you have some losses and you drop back to $11,500. Is this reason to worry? As long as the overall market trend is still intact your odds of picking winners on the long side are still good.
As long as we follow some good swing trading strategies we may now move up to $15,000 fairly quickly. This is what swing trading is all about. Many traders would have been devastated by dropping from $13,000 to $11,500.
Many swing traders get upset for the wrong reasons. You cannot control how profits are made all, you can do is ride the trends when they occur.
Swing traders who follow trends will have greater upside volatility than downside because they are swimming with the tide and let the winners ride until there is a good reason to get out. While at the same time exit losing trades quickly to keep profits from disappearing.
What is important to keep in mind is that we stay with trends
What is critical to keep in mind is that swing traders stay with profitable trends, they often last for a long period of time, longer than anyone thinks.
When there are periods of sideways, non-trending markets with lots of whipsaws that is where swing traders can get hurt. If the market is not in a clearly definable trend then most likely individual stocks will not be either, since most tend to follow the market indexes.
This is when experienced swing traders stay out of the market and hold onto hard fought profits.
When the markets do break out and form the next big trend, whether it’s up or down, that is when we make our profits. This is the time to just sit tight and hold on, letting profits accumulate.
Exiting a trade early to protect profits assumes you “know” ahead of time when a trend will end.I can assure you, no one knows who far and for how long.
So the swing trader must allow the trend to complete before we exit. That means we will catch the “majority” of the trend exiting only when our trailing stop gets hit.
Huge Volatility Equals Huge Profits
Remember, the biggest profits come with the highest volatility. So as long as the market is trending we are sticking with the trades that work, whether long or short.
You will have some small losses when trends fail, they always do at some point. But we make huge profits by riding the new trend as long as it lasts, to the upside in long only strategies, or short if that’s what the current market trend is.
So as long as we are trading with the trend, trailing our stops, we do not have to agonize over protecting an open profit, or need to constantly change our strategies to find ways to reduce volatility.
The question really is not how to avoid volatility, but how to manage it with proper risk management. And we do this by not allowing failed trends to accumulate losses, and not closing out profitable trades early.
There is a massive difference between volatility and risk.
Most traders think they are the same thing. However embracing volatility while at the same time controlling risk (keeping losses small) is the key to successful swing trading.
When the markets are not trending well is when we must be most vigilant that we don’t give back too much of our profits. There will probably be several failed trends that generate small losses.
But successful swing traders see these periods as the base for the next huge profitable trend.
Successful swing traders get excited when they see periods of sideways, non-trending markets as they know what will come. At some point the market will make its next huge move!The longer the sideways market, the bigger the resulting trend.
Unfortunately, many swing traders do not understand the logic of trading trends. As a result they are not around when the big trends do occur.
They are trying to find a new strategy or a new swing trading service that guarantees them profits.
This is a futile and destructive goal.
Small losses are inevitable, however so are the huge gains that are achieved by using trend following strategies. Taking the trades as they come, minimizing the losses when trades don’t work, and riding the inevitable big trends for all they are worth.
If you can do that, you will make BIG profits swing trading!
If you are just starting out, then using the swing trading service will start you on the right path. Learn their profitable strategies and money management techniques.
Here are the two stock picking services I use:
If you are looking to open a brokerage account or looking for a better one, I wrote some reviews of brokers I have used and currently using.
OptionsHouse Review (Currently Using)
Scottrade Review (Used when I first started)
Regardless of which Stock Picking Service you use or if even if you choose to go it alone, please download my two trading guides; 7 Habits of Millionaire Traders and How to Take the Proper Size Position for Your Account
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If you have any questions about Microcap Millionaires, Jason Bond Picks or any of the other stock picking services I have reviewed, feel free to contact me and I will get back with you as soon as I can.
– Robert Walsh