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.