SlashTraders is a platform providing traders with the tools to speed up their learning curve and better understand the ins and outs of the options...
Volatility Makes the Stock Market a Paradise for Traders and a Nightmare for Investors
Increased price variance creates opportunities for agile and dynamic traders with their fingers on the pulse.
Markets reflect the economic and political landscapes. The world has not experienced war in Europe in over three-quarters of a century. On Monday, February 21, Russian President Vladimir Putin laid out a historical justification of why Ukraine, a sovereign nation since the USSR fell, should be under Russian control. On February 24, the Russian military attacked Ukraine.
After suffering from the global pandemic over the past two years, the world faces geopolitical tensions and war with nuclear powers on opposite sides of the battle lines. Even if NATO members and Russia do not engage in hostilities, sanctions will disrupt markets across all asset classes. Moreover, Russian activities in Ukraine could accelerate Chinese desires to reunify with a sovereign Democratic Taiwan.
Volatility in markets across all asset classes will become the norm instead of the exception in the current environment. Increased price variance creates opportunities for agile and dynamic traders with their fingers on the pulse of markets, but it can be a disaster for passive investors with static portfolios. All market participants should adjust their strategies to reflect the current conditions.
Develop a plan before entering any risk position
- Organize your thoughts before executing any long or short position.
- Identify if the risk position is a trade or an investment.
- Never allow a trade to become an investment because the price moves contrary to expectations.
Risk / reward is critical - Stick to the plan
- The plan should include how much capital you are willing to risk.
- The desired profit is a function of the risk.
- You should avoid risking more than you are looking to make on a risk position- A 1:1 risk-reward ratio should be the minimum.
- Do not alter the plan if the price moves against you.
- Consider altering the risk-reward profile to protect profits when the price moves in your favor.
Adjust risk to reflect increased volatility
- In volatile markets, price ranges increase.
- Risk-reward is dynamic- It should always reflect the current level of price variance in a market.
- Adjusting risk-reward to reflect current market volatility improves the odds of success.
Adjust leverage to reflect the current environment
- Leverage is a valuable tool to enhance market exposure.
- In less volatile markets, leverage increases the odds of success.
- In highly volatile markets, leverage can decrease the odds of success.
- Adjust leverage to reflect the current market volatility level.
Be careful in all markets and expect the unexpected
- Inflation is raging, and the Fed is preparing to increase interest rates to address the economic condition.
- The bond market has already declined, expecting higher rates.
- The geopolitical landscape has deteriorated with the war in Europe involving a nuclear power.
- China may follow Russia’s lead and look to force reunification upon Taiwan.
- The current geopolitical climate supports higher commodity prices and higher inflation, putting the Fed further behind the curve.
- Economic and political factors require caution in markets across all asset classes.
- Expect the unexpected, and you will be prepared and not disappointed.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!