Trading During Market Uncertainty & Volatility
In recent times, traders have been faced with a myriad of news and economic events, and such events are typically driving forces behind market volatility. Recently, we have seen the government shut-down in the U.S. as well as the debt limit debate there, Congressional mayhem (also in the U.S.), and U.S. lawmakers coming out and saying such foolish things as an American default on its debt wouldn’t have dire global economic consequences.
Despite the current increase in market volatility from recent news and economic events, it really doesn’t matter which particular event is happening, because throughout your trading career there’s going to be a near continuous stream of events acting as catalysts for volatility, so you need a plan to deal with the daily threat of uncertainty and volatility in the market. I’m sure you all remember the economic ‘melt-down’ of 2008 that started in the U.S. and then the euro-zone ‘crisis’ of 2010…there’s always something happening that the media likes to pump up and blow out of proportion. However, despite all the rhetoric and fear tactics used by the media, the market always survives and the price action is still there waiting for a talented trader to interpret and profit from. Life goes on.
The great news distraction
What’s the reason for today’s article, you might be wondering? I wrote this article because in recent weeks I’ve had an unusual amount of questions on the email support line about events going on in the world and how they might affect the markets. Every time a major event happens in the world I get a flood of emails from traders asking a range of questions about the potential implications of these events and how they should adjust their trading method to account for them.
First of all, I’m happy to hear from people, but it does become concerning when I get a high volume of inquiries from people who are clearly overly-absorbed with the news and how it may or may not affect a market. I’ve been a trader for 12 years, and if you‘ve been following my blog for a while you know that my opinion is that following the news and economic events will have dire consequences for a trader.
When you look at a price chart of any market, you cannot see a government shutdown or a war, all you see is price action, and that’s all that really truly matters. Whatever is happening in the world on any given day is reflected via the price action in the market. Simply put, by spending time analyzing and thinking about global economic news events, you are just distracting yourself from what you should be focusing on; price movement.
Today, I am asking you to tune out all the economic news you may be used to reading, forget about it for at least 2 weeks and only focus on the price action, see if you don’t just feel more calm and collected as you analyze the charts. The less variables you have swirling around in your head, the better your trading results are likely to be, and remember, all the news events and the fear-driven media stories are all going to be reflected in the market’s price action, and how these events affect price is all that really matters anyways. Economic news and other fundamental variables are really nothing more than distractions that steal traders’ time and mental energy, causing them to over-complicate the entire trading process.
A trader’s contingency plan for ‘economic disaster’
We’ve just talked about why paying too much attention to economic news and other global events is a waste of your time and head space, but what is usually not mentioned in this topic of discussion is HOW to prepare yourself so that you don’t fall prey to the temptation of news-obsession.
What you need is a contingency plan to help you deal with any potential emotion that you might experience from any type of news event that affects the market. Whether it’s a potential war like we saw recently with Syria and the U.S., unrest in Egypt, Israel, or whatever the latest U.S. political or economic crisis might be…you have to be prepared for the potential of such news events to cause increases in market volatility and what this volatility might do to your trading mindset.
A lot of people think of a trading “strategy” as something that only tells them how they will enter and exit the market, but what your trading strategy also needs to include is a contingency plan for “surprise” situations where volatility spikes and the market doesn’t do what you thought it would. In these types of situations, many traders get caught off guard from the increase in volatility or by some news event making the market do the opposite of what they were expecting. You need some way to deal with these situations so that they don’t cause you to become overly-emotional as you are sitting there watching the market go crazy.
Your “contingency plan for economic disaster” is what you can call it (the ‘economic disaster’ part is meant as a joke because the media makes everything out to be a huge disaster or some sort), and it only needs to consist of a simple statement that you read to yourself to remember that price is always right, despite what the news is saying or what you just heard on CNBC or Bloomberg. You need to realize that all this market news and “hoopla” is just a charade that only masks the real view of what a market is doing. That view is what you see when you look at a raw, natural price chart, it’s the footprint of money…a market’s price action.
The charts don’t lie, so no matter what all the ‘guru’s on T.V. are saying, just remember that they are getting paid to attract viewers, and what attracts viewers better than fear and big headlines? Thus, if you are in a trade and the U.S. Federal Reserve bank comes out with a surprise interest rate hike, causing the market to spike and volatility to increase, you need to resist the urge to “figure out what happened” by watching your favorite financial news channel and instead look at the raw price action on your charts…because they are showing you the only thing that matters: how the interest rate hike or other news event is actually affecting the market’s price action.
Traders do things all the time like waiting to take a valid price action buy or sell signal until after President Obama speaks or until after some other potentially volatile news event. Then what inevitably happens is that they miss the first and best entry because they were waiting for the news event, and before they know it the market is up 2% for the week. You need to separate yourself from all these emotions and feelings that get kicked up as a result of these news events, and the easiest way to do that is to just ignore them, stop focusing on them. If you do find yourself starting to become influence by them, that is when you will read your contingency plan for “economic disaster” to remind yourself exactly why you need only focus on the price action and forget about the news and the emotions you’re feeling because of it.
Adaption is the key to survival
Part of your contingency plan as we discussed above, needs to discuss how you will adapt to market conditions if they suddenly become more volatile due to some news event. Just as crocodiles have survived since the time of dinosaurs by adapting to their changing environment, you also need to adapt to changing market conditions if you want to survive and thrive as a trader.
When volatility increases, so should your stop loss width. You need to give your trades a lot more room to breathe when volatility increases, because there will be large swings for and against your positions that can easily stop you out and then continue on in your favor without you on board.
If you have not read my article on how to place stop losses, then please do that ASAP. The main thing you need to understand is that during volatile market conditions you will need wider stops and you will want to be sure your stop losses are placed on the far side of any nearby key levels. Also, if you get a nice 4 hour pin bar signal (other price action setup) during a volatile time in the market, it will probably have a wider range on it, so that means you need a wider stop loss than you might be used to. This is fine, just remember that you need to adjust your position size down to meet the wider stop loss that you need to use, that way you do not increase your dollars risked per trade.
Many traders get confused in the beginning of their careers in regards to stop loss distances, they think a bigger stop means more risk or a smaller stop means less risk. In reality, you can control your dollar risk on every trade by simply adjusting up or down the number of lots you are trading (your position size) so that your pre-determined and desired per-trade risk amount is always maintained at or below a certain dollar level. Thus, when volatility increases in the market, you may need to use wider stops to stay in the game and profit from the volatility, but that does not at all mean that you will need to risk more dollars per trade.
It is critical you heed what I am talking about here in regards to wider stops. If you don’t widen your stops as required by an increase in volatility, and reduce your position sizes, you will find yourself in a very precarious situation of losing a lot of money really fast. Many traders try to take advantage of volatility by actually doing the opposite; they increase their risk per trade and over-trade, and this causes them to lose money. Volatility can make you money fast, but you need to respect it and even fear it a little bit, because if you don’t you’ll end up becoming its victim instead of profiting from it.
Uncertain times call for a consistent and clear trading approach
The reality of trading is that the difference between traders who consistently make money in the market and those who fail, is typically how well they handle volatile and uncertain market situations. It is erratic price movement in a market or a trade that does not work out as planned that causes losing traders to over-compensate and try to “make back” the money they lost. A losing trader will try to “figure out” why a particular news event caused their trade to fail in such dramatic fashion, whereas the successful trader will just take in on the chin and accept that the price action is never wrong and that this particular trade just happened to be a loser, however, the next one might well be a winner.
Thus, getting too hung up on any one trade or on any one news event is a quick way to frustrate yourself and kick-off a landslide of emotional trading errors that ultimately result in you losing a huge chunk (or all) of your trading account. Stop trying to figure out what might happen based on the news (doing so will drive you insane) and start focusing that mental energy on the market’s price action and what it is telling you….because that is all that really matters. Thus, in times of market uncertainty and volatility, you’re primary contingency plan to deal with an increase in emotion should simply be to remember that the news really doesn’t matter, what matters is the effect that the news is having on the market’s price action, and if you want to learn how to interpret and trade that price action checkout my price action trading course for more in-depth information and training.
26 Comments Leave a Comment
Great one again.
fast forwarding to 25jun2016 after Brexit and still great to read this article. thanks Nial.
Nothing more to comment but to agree with the above and add a plus THANKS.
Just a opinion, helps to keep eye on events calender to be aware of the event times?
Thanks Nail, very good article.
Dear Guru, after reading your articles I stopped watching the economic news at all. But last week during Oct 17th, I panicked and didn’t trade for the whole week because the shut down is coming after 17 or so years. Also I killed 2 profitable trades in 2R profit instead of my ‘set & forget’ plan of 3R profit. Right article at right time…Thank you Guruji for your continuous education.
Thanks! Great article again Nial..
This article is very helpful to me, though I really do not follow any news while trading.
Thank U sir, for sharing about how to place our stop losses while these volatile trading conditions.
thanks Nial well said
Nial, I must confess you are the only master i need in the forex market. For the past weeks i have been try to study how to trade the news from one of the fundamental guru but you what? i come across your email in promotion area of my gmail and after going through it am completely satisfy with your explanation. God bless you for your continue free guard which as been give me hope that one day i will start to make money in the forex market. Am try to save some money to be one of you membuer, be for i will fund my account again thanks.
Nial – reading your articles is part of my trading plan because your content is keeping my psychology in check. This article here is an excellent fit for the past two weeks. Thank you for your on-going effort and creativity and for all that you taught me. You made me a trader.
What a great message from NIAL !!!…………..TOTAL FOCUS ON ” HOW TO INTERPRET AND TRADE “THE PRICE ACTION ” AND FORGET ABOUT REST- ALL.
Let’s follow it seriously, to make our trading profitable and a lot easy.
NIAL, Thank you so much, GOD bless you ,your great PARENTS and your noble Family.
warm regards, AMIN MALIK
Van Tharpe talks a great deal about position sizing your way to financial goals. In every book Ive read on his he quite clearly states that picking the right stock has zero to do with our success. Rather, its all about position sizing our way into financial freedom. Hence the reason I believe you have focused on the volatility issue. And one of the reasons why Alan Farley encourages entry @ tight restrictive price actions. What I like to call…”Pulling into the station” …Its less volatile as an entry – with an expectant explosion in price! But sometimes that explosion is definitely NOT in the intended direction! So Van Tharpe talks about ALWAYS having a worst case scenario plan.
What I appreciate about your article is the true & effective statement… “whereas the successful trader will just take it on the chin and accept that the price action is never wrong and that this particular trade just happened to be a loser, however, the next one might well be a winner.”
This is a helpful reminder for those of us who need to learn this reality. I happen to be one of them. As for the world events and the news, its just blah blah and more blah to my ears. I dont have a crystal ball, so any event that is “catastrophic” (Japans tsunami) etc, is only knowable in hindsight. Uranium dropped dramatically to then provide a fantastic bounce! It was ultimately a dead cat bounce, but nonetheless a remarkable opportunity to profit in the case of PEN-ASX.
So volatility was insane…but so too were the profits within the following 5 days! I guess its all about the juggle of risk to reward. As van Tharpe says, think of your success in terms of 1R risk multiples….And to that end, the media means absolutely nothing!
Great work again, Nial – thank’s for that :)
..its a nice compensation for all the wrong trades in the past & a brilliant view for the comming ones
thanks Nial, price action is all we need to know in fact i profited fromm the recent fakey setup on aususd n i never even knew about the U.S shutdown n their economic troubles.
this is so true, a thing that had happen to me, and now i’m in the process and re-building my account and one way i find it to be heading the right way is not reading any economic news which i used before, and how happy i am on that decision. so to those still caught up in the drama and hype of econimic news, heed Nial’s advise…STOP ASAP…..
Good stuff as usual Nial, it’s not only news that influences ones decisions to take trades, I’ve found that having any other indicators on the chart also creates uncertainty in your mind, there will always be one or two that says “no” and stops you from taking perfectly good price action trades. I think trading is an individual occupation, any outside influences causes one to question themselves and therefor miss out on good opportunities.
My girlfriend’s best friend used to be a broker in London and she told me that she once tried trading but found it too stressful, she said that she would be looking at a chart and it would be telling her to sell but she could hear others around her talking about the fact they thought it was going long. This cast doubt in her mind and stopped her entering trades. She then became angry with herself for listening to others. She never made it as a trader for that reason and went back to being a broker!
All the best
Nial, your view on watching PA and ignoring the news is right on the money. I lost out of so many good trades because of this, exited early etc. The last month I have been ignoring the news almost completely (except the NFP and Bernanke speech). The results have been outstanding. Less stress too. Thanks mate!!
Yes… How many time happens that exit very bad news for USD and EURUSD go down instead of go up? Recently for example, US Government has avoided the default and USD lost terrain versus all the others!! Why that? There are some reasons that we, poor retails, we will never know… so the only certain thing we have is what PRICE is telling us!
And in my last exaple, if you look a weekly, daily, h4 and also h1 chart it was written that eurusd will go up but how many of you have longed eurusd knowing that default was avoided?? I don’t think many!
I did it becouse Nial has teached me to look only what price is telling me, not news, media, cnbc or bloonberg!
Thanks Nial, it was another great week!
Great advice as always, Nial. Thank you. Have printed this lesson so as to keep it as a reminder.
I don’t know what I can say to describe the huge change that your system and approach has made in my trading life, after 2-3 years of struggle. I just can say thank you and ask God for the best things in your life, beacause you are not only a big teacher, but also a nice, valuable and generous man who shares his knowledge to improve the people’s life. God bless you and thank you again for another great article.
Yes, that’s true, I don’t follow news anymore. I have already made 2 successful trade without even knowing about US shutdown!!! funny!! ;-) you just need 2 or 3 good trade a month guys!
Great article again Nial and as always the proof is in the pudding ..we have traded purely on price action this week ignoring the news and have a good week, not exceptional but pleasing and have taken profits to target. So good man …what you say as always means you don’t just talk the talk but unlike many you walk the walk …have a great weekend ! Thanks Geoff (UK)
Cheers to the Crocadial way!
The fear of the unknown has kept and is keeping alot person in poverty.
Somehow i expected an article like this one this week.