7 Golden Rules for Navigating Market Volatility
January 16, 2023
The volatility of markets is both a problem and an opportunity for those who practice trading. On one hand, it produces many price fluctuations, which tend to be deep, creating occasions to generate a surplus. On the other hand, however, it generates confusion, reduces the space for analysis, disorients, and induces errors.
Fortunately, there are techniques and actions capable of protecting traders from the negative consequences of market volatility. From this perspective, the trader would exploit the pros of volatility, adequately defending themselves from risks and threats.
Here then is a list of tips inspired by a recent article that Andrea Unger, a famous trainer, published for the Huffington Post.
Give weight to training
Training is a fundamental element for anyone who wants to approach a complex activity such as trading, especially if speculative. The advice is to take all the time necessary to become familiar with the mechanisms and develop a wealth of technical knowledge, thinking of trading as a marathon, where results emerge over the long term. Wanting everything right away, and therefore arriving unprepared for the appointment with the market, is the best way to lose your capital.
Carefully choose sources
Trading is also a matter of information. After all, prices are influenced by what happens beyond the market, in the economic, industrial, and even political world. Hence, the need to inform oneself extensively and well. The advice is to carefully choose sources, so as to avoid the elaboration of false signals, which always translate into... False steps.
Keep emotions in check
The issue of emotions is at the forefront among traders of all levels. Given what is at stake, it is impossible not to experience strong emotions, not to undergo psychological pressures, albeit predominantly endogenous. Well, emotions cannot be removed, but they can be kept in check.
How to do it? It is necessary to develop the right mindset, which is nourished by rational behavior, which gives the right meaning to the concepts of victory and loss, which can be fueled by an approach as scientific as possible to trading.
Decide sustainable losses in advance
The trader's approach must be, basically, pessimistic. That is, the trader must take into account that sooner or later they will lose money. In fact, they must consider defeat as part of the game, and therefore trace it back to a more general plan, elevating it to a "variable". This is a good thing, as it increases the feeling of control and the trader's effective room for maneuver. In particular, they should "decide" in advance the maximum possible loss, and elaborate their trading actions based on the boundaries they themselves have drawn.
Contextualize losses
Therefore, losses must be contextualized, reconsidered also from a psychological point of view. They should be thought of not as a sign of defeat, or worse still of incapacity, but as a normal occurrence, as an episode in the story that, at least in theory, should end with an actual success.
Diversify
This is a golden rule that applies to any type of investment. Diversification, after all, is the most effective weapon to protect oneself from market volatility and the inherent unpredictability that structurally permeates them.
Obviously, one must diversify intelligently, adopting an approach that is both prudent and proactive, which can on one hand protect against possible losses and on the other create good profit opportunities.
Test strategies
Finally, it is necessary to equip one's trading with a strategy, that is, a system of rules that intervene in all phases of the investment, from analysis to operations. The purpose of the strategy is to give a scientific character to investment activities and at the same time reduce the risks of psychological pressure.
The strategy can be considered as an instruction booklet that says what to do, when to do it, and how to do it. The room for maneuver is reduced precisely at the moment when it is good to insert the "autopilot", precisely at the moment when emotionality can overwhelm the trader and deprive them of the necessary lucidity.
Obviously, strategies must be tested before being used, and the tools available are numerous.
