We’ve had a significantly different market in 2016 than many people are accustomed to trading. Overnight gaps, intraday reversals and huge ATR’s have made it a more challenging trading environment than the previous several years.
If you’re accustomed to nice, neat, well-behaved markets, this year has been an eye-opener. Perhaps you’ve had some losses. Perhaps you’ve just had more stomach acid. Perhaps you’ve paid a LOT more in commissions for your adjustments. Perhaps your trades have drawn down more than usual. Combined, it can give you the blues.
But, to paraphrase the late, great David Bowie, “Let’s Trade! Put on your red shoes and trade the blues.”
All good mentors and teachers have said it in various ways – to be a trader, you have to trade!
Back-testing and paper trading are invaluable but nothing replaces live trading with real money. In the last January Community Coaching session, John (with great enthusiasm) said what a fantastic environment this is for learning. It is!
If you’re planning to become a long-term trader, you’ll have to trade through different types of markets. There’s no avoiding it, so you might as well take advantage of this one and put another notch in your trading belt. But’s important to recognize that it will be a learning experience (which builds character!) and that means that you need to be more careful.
The question then becomes, how to trade safely? There are a number of techniques to help you get experience without getting hammered.
- The easiest is to reduce your number of contracts. If you’re trading something that allows for smaller lot sizes (Super Simple Spreads, Bearish Butterfly) now might be the time to dial back the trade size. If you’re trading something that is typically a larger number of tranches, reduce the number of tranches or use capital control methods to keep it smaller.
- Try trading IWM or SPY instead of RUT or SPX. You can stay with your usual number of contracts but not have as much money in the market. Yes, you’ll eat it on commissions but that’s better than eating it on a large loss, isn’t it?
- Don’t deviate from your plan. This is NOT the time to start getting frisky with your trading rules. Ch-ch-ch-ch-ch-changes (get it?) may work in your favor (if you’re lucky) but more likely you’ll end up getting a very nasty surprise (if you’re not).
Besides, the whole point is to learn how YOUR trade works in this environment. If the plan doesn’t handle it well, change the plan after the trade is closed and you’ve dissected it.
Just don’t change it mid-trade.
The real test for whether you’re trading safely is if you can Sleep Well At Night (SWAN). But unless there’s a compelling reason, don’t stop trading. As an income trader, you need to trade during all types of markets and the only way to gain that experience is to do it.
Written and contributed by Cynthia Sarver