A lot of people who start trading are wary about losing their money and are scared that seismic volatility in the market will result in considerable losses for their investments. When you factor in all of the crazy things happening around the world every day: tweets by world leaders, current events like Brexit, and c-level executive scandals among others, there is potential for extreme swings in the market prices for an assortment of instruments. There are a few steps that can be taken in order to heavily reduce the risks of volatility altogether.
How to prepare for volatility?
Buy into the S&P 500 Low Volatility Index
This index is for the most risk-averse types of traders, ensuring that even substantial shifts in the stock prices for individual companies have only a negligible effect on the overall portfolio of the index. It is even more conservative than the S&P 500 and there is a relative expectation that you will not lose money, however, the total upside you receive will certainly be limited. This is a direct way that traders who do not wish to deal with high volatility markets can engage with long-term trades that have historically shown consistent returns.
Do Not Seek Professional Advice
Although you may be inclined to take professional advice from brokers, experienced friends, or other outside expertise, the truth of the matter is that no one actually knows what will happen within the markets. Learning from people who are more experienced than yourself and that have similar mentalities or strategies for approaching trading is always a good way to familiarize yourself with what decisions and course of events that you deal with, but it should never be the reason why you make a particular trade or decision. If you do not want to deal with the constant day-to-day decision making and are not willing to learn the important skills for yourself, perhaps you should reevaluate your own interest in trading in the markets.
Use the Backtester Before Trades and Keep Perspective
Oftentimes, what may seem like extreme volatilities may just be an anomaly blip and should not be taken to the extreme when it happens. Using tools like the BetterTrader backtester will allow you to simulate, prepare, and analyze your trades based on the trends that have happened in the past and expect the volatility that is coming. Thereby allowing you to be more informed about how the markets have reacted in similar situations.
History shows that patterns repeat themselves in both the upwards and downwards market. As such, with this backtester, you can reveal these markets. Even during these downturns in the market, you should continue to trade consistently, as oftentimes, the best times to buy particular instruments is during these poor conditions when the prices are at their lowest. As traders, we should like and appreciate volatility. The key is to be informed at all times and this will allow for ample opportunities to make lots of money.
As traders, we should like and appreciate volatility.
Utilize Stop Losses
While it is smart to not panic, freak out right away, and sell your positions when they hit their lowest point, many times this is not the case, and the volatility in the instrument is actually indicative of a tanking asset. In these cases, you should set a stop-loss that can minimize the amount of money that you lose. A stop loss is an order placed with a broker that has them sell a given instrument once the price dips to a particular price. This is a way to ensure that you will not lose more than a set amount. Learn more about what stop losses are, how to set them up, and why they are so important here.
BetterTrader is an analysis tool that interprets economic event releases, current events, and other relevant happenings around the world into actionable insights in real-time. BetterTrader was created by a team led by day traders with real insights and experience on the world’s biggest exchanges. Click here to open a free account.