This wild and crazy market correction has been so replete with intraday volatility that even the most placid traders I know have been pushed to the brink of hysterics. Let’s face it: It’s hard to be calm, cool and collected when the Dow plunges 635 points one day, surges 430 points the next, then crumbles 520 points the following day. Now normally, volatility is good for traders, as astute buyers and sellers can make some great money if they get the timing right. Unfortunately, you also can get your hat handed to you in a matter of minutes.
Over the past couple of weeks, I’ve sought out literary material to help keep me calm. The other day I came across Rudyard Kipling’s poem, “If–”. Here’s the money quote from this great work: “If you can keep your head when all about you are losing theirs …” Yes, keeping your head in a crazy market is easier said than done, but the task can be made a lot easier if you take a few steps to mitigate risk and palliate your fear. (See my recent article on 5 Stocks to Survive a Wicked Downturn.)
First off, if you can’t afford to lose most of the trading capital you have right now, then you simply should not be trading. What I mean here is that when it comes to trading, you have to be willing to sustain some big swings in a market as volatile and as unpredictable as this. If you can’t withstand the swings, or if the volatility is eating away at your psyche like an insidious cancer, then the best thing to do is cut out the cancer and go to cash.
Second, don’t try to outsmart the market. The overwhelming bias right now is to the downside, as indicators like the Chicago Board Options Exchange Volatility Index, or VIX, clearly indicate. In fact, during the Aug. 4, 600-plus-point shellacking of the Dow, the VIX had its largest daily percentage spike since early 2007. This measure of fear in the market tells us that put buyers are running rampant, and until the VIX comes off its latest highs, we are likely to see more downside pressure. What this means is you have to be extremely cautions if you are going to be an aggressive long buyer. Be it call options, stocks or leveraged ETFs, if you aren’t willing to take a big hit in these type of assets, then don’t jump in the fight with your trading capital.
Finally, don’t let yourself suffer psychological damage. If some big trades go against you (and I don’t know any trader who hasn’t had this happen to him of late), then accept your loss as part of the game and consider it a learning experience. Whatever you do, don’t beat yourself up over getting caught in the wrong direction of this crazy market.
Just as it’s impossible to have a rational conversation with a madman, it’s also hard to figure out this crazy market. You can have all of the right logic on your side, and still your rational choice can get slammed. If you want to play in this wild game, then don’t be discouraged if you lose sometimes. And, if you can’t afford to, or you don’t want to subject your trading capital to potentially big losses, then there’s no harm in waiting things out on the dock until the waters calm. Doing so might just allow you to keep your head when all about you are losing theirs.