Dealing With Volatility, Uncertainty and Turbulence In The Markets
By Steve Ward,
Over recent months the markets have been marked by high volatility underpinned by lower liquidity and higher uncertainty. It has been a turbulent time for many traders who have found the market moves, the lack of liquidity to trade in and out with, the continual stream of market moving news and economic data and the resulting high levels of mental, emotional and physical energy required to deal with these events draining.
How have you fared over recent months?
It might be like some traders that you thrive in such turbulent and volatile conditions. That your persona and your trading approach and strategy are best suited to such an environment. Or, it may be that your standard approach and indeed your own personal preference is not best suited for such conditions. If you are in the first group then a primary aim is to make the most of these conditions, to maximise your returns while you are hitting your sweetspot. If you are in the latter group then you may fall into one of three broad responses:
1. Stop trading – these conditions are not for me.
2. Keep trading BUT using your old approach which may not be the best fit for the market environment -round peg, square hole.
3. Be flexible, and look at how you can tailor your approach to the current market environment to optimise your returns.
Option 1 will yield zero returns, but obviously has zero risk.
Option 2 in many cases will lead to low returns, and probably even losses as there is a mismatch between environment and approach. Sometimes traders aim to trade there way through such conditions hoping that everything will return to ‘normal’ soon – however, what if there is no return to the old ‘normal’? what if the turbulence of now became the new normal?
In option 3 being more flexible in your response and approach can help to yield returns from such conditions, but there is of course risk to this, and the process of actually changing and adapting. However, this may not have to be significant. It might simply be a change in the level of focus you are applying to your trading. It might be a change in your stop loss positioning to account for the increased volatility. It might be a change in the market you trade in response to liquidity issues.
From a performance and psychological perspective there are a few key pointers which will help you to deal with and trade these conditions more effectively.
1. Accept the conditions as they are. There is no point wasting time and energy each day hoping for the markets to return to how they were. Acceptance creates a very different mental and emotional state to resistance.
2. Maintain a high level of focus. During such times the penalties for mistakes and bad trading decisions can be significantly higher. Being ultra attentive to what is going on around you, being situationally aware, is key. In general when you are watching the markets in normal conditions you would be in what is know in security terms as a level of relaxed awareness’. In these current times though it is probably necessary to move up to the next level ‘focussed awareness’. This is described in an interesting article ‘Situational Awareness: How Everyday Citizens Can Help Make a Nation Safe’ (read more: Situational Awareness: How Everyday Citizens Can Help Make a Nation Safe | STRATFOR) as “like driving in hazardous road conditions. You need to practice this level of awareness when you are driving on icy or slushy roads, or when the roads are infested with potholes and erratic drivers that exist in many Third World countries. When you are driving in such an environment, you need to keep two hands on the wheel at all times and have your attention totally focused on the road and the other drivers. You don’t dare take your eyes off the road or let your attention wander. There is no time for cellphone calls or other distractions. The level of concentration required for this type of driving makes it extremely tiring and stressful. A drive that you normally would not think twice about will totally exhaust you under these conditions because it demands your prolonged and total concentration.”
3. The last sentence above alludes to another of the challenges of trading during such periods – tiredness, or as someone recently mentioned to me ‘news fatigue’. The continual high level of focus and attention required during such turbulent times impacts on your levels of mental, emotional and physical energy. Feelings of fatigue and exhaustion can set in, and these impact on cognitive functioning, on your ability to make good trading decisions, and also on your levels of resilience; your ability to deal with the challenges presented to you. Sleep, nutrition and exercise are all key to helping you to replenish vital energy stores, and the power of a quick break and walk away from your screens has been shown by neuroscience to also be highly effective in helping to manage cognitive energy.
In summary; Adopt ‘Focused Awareness’; Accept the conditions as they are; Adapt as appropriate and useful; Actively manage your energy levels and particularly recovery and replenishment.
Until next time…
To find more articles written by Steve Ward, please visit www.highperformanceglobal.com