The stock market’s volatility has been very high recently. The stock market’s day-to-day swings are being impacted by news. And with different members of the Trump administration saying different things each day, it’s impossible to predict where the market will go in the short term with a high degree of confidence.
The market’s volatility is scaring a lot of people. It’s going up and down 2% each day. Here’s what you should be doing when the market is very volatile.
Don’t look at your screen
For the love of God, do not stare at the market. It can become obsessive and drive you crazy.
News is coming out at a rapid pace, and the honest assessment is that you have no idea how the market will react to a piece of news.
- A “bearish piece of news” might come out, the market will tank 3%, and then reverse upwards 3% the next day.
- A “bullish piece of news” might come out, the market will surge 3%, and then reverse downwards 3% the next day.
Trying to predict how the market will react to each piece of news is futile, especially because you don’t know what the news will be tomorrow or when it will come out.
Obsessing over the market’s minute-to-minute price will cause you to make rash decisions. Remember, successful trading is all about using a rational, systematic strategy. Staring at the price might make you panic and react in an irrational way.
This is especially dangerous when the market is swinging with high volatility (i.e. the trend isn’t clear).
- A bearish piece of news comes out. The market tanks. You sell. Then the market reverses upwards and you cut loss.
- A bullish piece of news comes out. The market surges. You buy. Then the market reverses downwards and you cut loss.
In addition, don’t think about how much money you’re making or losing. Whether you’re making or losing money right now should have no impact on whether you think your market outlook is right or wrong. Having a trade go against you in the short term is perfectly normal. What matters is whether the REASONS for why you are bullish/bearish are still valid.
Being bullish just because the market is going up is not a valid reason. Being bearish just because the market is going down is not a valid reason. That’s not rational trading. That’s letting your human emotions make “gut feeling” decisions.
Remember what Warren Buffett does: he only looks at the market’s daily close. This is what medium term traders should do. Just because the market is crashing at e.g. 11 am does not mean that the market will not reverse upwards towards the close. The market’s intraday fluctuations are mostly random.
Ignore the volatility
Many traders panic and abandon their strategy when the market’s volatility increases. This is not correct.
You should stick to your same BUY and SELL signals but reduce your leverage when the market’s volatility increases. This is why I changed from being long UPRO to being long SSO.
Whether the market’s volatility is high or low should have no impact on your outlook. Volatility is not a consistent and accurate predictor of the market’s future performance. Volatility is not a timing indicator for the market. For example:
- Just because the market’s volatility is low doesn’t mean that it will tank in the future. The market’s volatility can be low for a long time.
- Just because the market’s volatility is high doesn’t mean that it will surge in the future. The market’s volatility can be high for a long time.
When the market’s volatility is high and you’re feeling fearful, just sit down, relax, and think clearly. Ask yourself these questions:
- Why was I bullish/bearish before?
- Are these factors will valid? Or have these factors disappeared?
- Are there new factors that go against my outlook which I did not consider before? If yes…
- How significant are these factors? Are they significant enough to alter my market outlook?
Remember, focus on your trading strategy and stick to it. Review your outlook. If your outlook is still the same, then ignore the market’s volatility and stick to your position. Your outlook should not change just because the market’s volatility has changed. Do not let fear take over your rational thought.