How to Trade Stocks in a Volatile Stock Market by Tony Oz

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The 4 Biggest Mistakes I Have Made Stock Trading in Volatile Markets

Mistake Number One -  Position Sizing

I cannot tell you how many times I have failed to adjust the position size of my trades to reflect high volatility and I ended up losing a lot more than I planned on.  You see, in volatile markets, supply and demand is pretty much one sided, and there is no firm bid or firm offer, so stocks go through support and resistance levels due to extreme forces of fear and greed.  My suggestion here is to cut the position size and even utilize multiple entries to establish a position.

Mistake Number Two – Mixing Up Time Frames

When stocks go down sharply in a short period of time, like in 2008 for example, it is hard to exit long positions for profit or small losses because of the greed factor.  I mean, what if I just nailed the bottom or close to it?  Yeah, this is one of the hardest things to do, and I tell you I had so many profitable trades back in 2008 that I let come back down to break even or a loss because of the fear that I may miss the greatest entry in the last decade.  Well, I have learned that I must define my exit point and time frame for the trade before I enter it.

Mistake Number Three – Respect the Machine Guns and Vacuum Cleaners

My students know that I refer to hedge fund program trading (black boxes, etc.) as machine guns when they shoot down bids or as vacuum cleaners that suck out all offers, (sweep orders outside the NBBO).  When such activity is present, I must reduce exposure or get out all together.  Sure it is nice when this one way momentum freight train goes in your direction, but you better get some serious pain killers if you are on the other side of the trade.

Mistake Number Four – Forget your Opinion and Follow the Money

I have often in my career traded with an opinion.  This is deadly when it comes to stock trading.  It is not too low to short stocks that have come down 50% or more.  I learned this lesson in the tech crash of 2000 and in the financial stocks collapse of 2008.  Don’t buy because it is “cheap” and yes you can sell it when it is obvious that no one wants it.  Don’t try to call the bottom and trade what you see not what you think.
Finally, remember that cash is a position and that capital preservation is your number one goal followed by increasing it.  That’s it for today.

Trade Smart!