If You’re Going To Trade These Volatile Markets, Here’s What Not To Do…

If You’re Going To Trade These Volatile Markets, Here’s What Not To Do…
Jonathan Hobbs

over 1 year ago5 mins

  • Volatile prices can create shorter-term trading opportunities – even in a bear market. And it can be tempting to try to make money off those moves.

  • If you’re looking to do some trading, there are a few common mistakes you’ll want to avoid.

  • Don’t trade too big or too often, and don’t forget to set a stop loss. Plan your strategies in advance, and don’t try to track too many investments at once.

Volatile prices can create shorter-term trading opportunities – even in a bear market. And it can be tempting to try to make money off those moves.

If you’re looking to do some trading, there are a few common mistakes you’ll want to avoid.

Don’t trade too big or too often, and don’t forget to set a stop loss. Plan your strategies in advance, and don’t try to track too many investments at once.

With the recent rout in stocks and crypto, you’d be smart to use dollar-cost-averaging to add some discounted assets to your portfolio. But you may also be tempted to try your hand at shorter-term trading on the side, hoping to earn quicker bucks off the market volatility. And if so, here are five common trading mistakes that you’ll want to avoid.

Mistake 1: Trading too often.

Large daily price swings can tempt you to “day trade” – i.e. get in and out of a trade in the same day. But day trading is a losing battle for most people.

First, it’s a full-time job. Since you’re trading based on how prices move within each day, you need to be watching and analyzing price charts almost all the time. So unless you plan on quitting your day job and turning trading into a full-time hustle, don’t bother.

Second, you pay a small fee on most platforms each time you trade. Those fees can rack up in a big way. So the more you trade, the more gains you’ll need to compensate for those fees.

Third, as a human day trader trying to play short-term price swings, you’re mostly competing with trading bots (i.e. algorithms) that can make snap decisions a lot faster than you. And they don’t get tired or fatigued either.

A more sustainable (and profitable) option is to not trade every day – and instead wait for the right trade to come along. Then when it does, stay in that trade for a few days or weeks. For example, you could buy into a relief rally in stocks or crypto that lasts a few days – and book profits along the way.

Mistake 2: Trading without a stop loss.

You probably wouldn't drive a car without a seatbelt, so don’t jump into a trade without using a stop loss. This simple risk management tool will automatically get you out of a trade if the price moves against you, at a level you plan.

Be sure to set your stop loss at the right distance away from your entry price. Too close to your entry, and you risk getting “stopped out,” or pushed out of the trade, too soon. Too far away, and you risk taking too big a loss.

Having a good understanding of technical analysis can help you set a stop loss below key price support levels (for a long trade) or above key resistance levels (for a short trade). But as we’ll cover in the next point, you can also base it on the loss you are willing to accept for a failed trade.

Mistake 3: Trading with too large a position size.

In Mark Douglas’s famous trading book, “Trading in the Zone,” he describes trading losses as business expenses – just as a restaurant owner pays for rent and staff, a trader must accept losses as an operational cost.

Even the best traders have losing streaks, where they stack a few losses before finally getting back to their winning form. Of course, large losses can put you out of business a lot faster than small ones, so be careful about trading with a large position.

For example, if you set your stop loss 1% away from your entry price, and your trade size is $1,000, you’ll lose $10 (less trading fees) if you get stopped out. Likewise, if you set your stop loss 2% away from your entry price, and you halve your trade size to $500, you’ll still lose just $10 on a bad trade.

Having smaller trade sizes and wider stop losses will likely result in more success over time. You’ll find you 1) get stopped out less often, and 2) keep your losses to a small percentage of your portfolio when you do.

The chart below shows why it’s important to keep your losses small by taking smaller positions. There are four traders, ranging from the most conservative (Trader A, in green) to the most enthusiastic (Trader D, in red). The chart shows what would happen to each trader's $10,000 account balance if they took 10 losses in a row. Trader A, with a 1% account loss would easily live to trade another day – even after 10 consecutive losses. But Trader D, who risked 10% capital with each trade, would already be down more than 50%.

Account balance of traders starting with $10,000 after taking X number of losses in a row.
Account balance of traders starting with $10,000 after taking X number of losses in a row.

Mistake 4: Jumping into a trade without planning it beforehand.

Trading based on a gut feeling might work out once in a while. But over enough trades, this usually ends badly. So take the time to plan your trades in advance, using key technical levels to decide when to enter, exit, and place your stop loss.

Planning ahead helps you to think through your trade clearly and unemotionally. In that state, you’re going to make much better decisions than you would when the market suddenly moves. For example, you might analyze a price chart one day and spot a key buying level. But the next day, when the price reaches your key level, you might not enter the trade if your emotions take over.

Whether you’re trading crypto or stocks, most trading platforms let you set your entry orders in advance using “limit orders.” Not only that, but you can set your stop-loss and profit-taking orders ahead of time too.

Mistake 5: Being in too many trades at once.

Diversification works wonders for long-term investing – which should be the bread and butter of any portfolio. But when you’re trading on the side, trying to keep an eye on too many price charts at once can get you into trouble. By limiting the number of assets on your trading watchlist to, say, 10 investments, you’ll get a much better handle on the price action of those plays. From those, you might then find one or two trades worth taking.

Remember, with trading (as opposed to long-term investing) you are managing your risk with a stop loss. So there's no need to be in lots of trades at once.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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