The market, especially Nasdaq, has been a volatile beast lately. Solid market trends continue to struggle to find bullish and bearish patterns. At times, sitting on your hands may make a lot of sense. I have said over and over the past couple of weeks that I believe it has been difficult in this market for swing traders (generally a 2- to 5-day trade) to make money because of the volatility. Note the hourly chart of Nasdaq from a few weeks ago (in this case the QQQ) below.

Remove Risk

I have also said it might be beneficial to take profits and cut losses quicker than under so-called “normal” circumstances when the market is not so volatile. To me this means looking for smaller profits and limiting yourself on the loss side too. For example, if you normally look to take a 50% profit, maybe consider taking a 25% or even a 20% profit instead. Remember, the thought process is to remove risk and think about profits second. The market has been moving around so much intraday and gapping almost every single open that limiting your gains actually removes risk sooner. Remember, your main goal as a trader is to preserve your capital and be a risk manager.

Control Losses

We have been talking about removing risk and protecting profits, but what about losses? The same thing goes for limiting your losses. Consider smaller contract size and risking maybe 50% of the max risk. With volatility rampant, you do not want to get “taken” out of a trade to find the position has recovered even the same session. Of course, how you want to do this is completely up to you. Consider this a general guideline to use as an example. It can be a trial and adjustment type of thing, similar to writing your trading plan.

Finally

As I like to say, the market is never normal, but there are times when it is more volatile. Some option strategies will work better or worse under certain market conditions too. This has been one of those times for me recently, so it may be a good time to strap on your risk manager cap just a little tighter. I am sure it will be well worth your time.

John Kmiecik, Market Taker Mentoring