Dear Financial Voice Reader,
When it comes to making money in the markets one of the most popular questions I am asked by my apprentices is what to do in volatile markets. Sometimes I appears the markets are out to get you. You buy and the market immediately moves the other way. Or you sell and it moves in the opposite direction.
Trading psychology is much needed to get through the feeling of paranoia of such losses. But what else can we do? These are things worth remembering:
- Eighty percent of your profits will come from twenty percent of your trades. This is common across all professional traders. You must therefore by logic cut losing trades quickly and re-entering when warranted.
- By logic too, when you find a trend, you add to it.
- By logic too, you do not add to losing trades.
When in a hole and it feels like the market is wrong-footing you have several options:
- You could take a pause. Sitting on your hands can make you money by making sure you do not make losses by going fishing in choppy waters.
- You can look at a longer time frame, or a shorter one. Sometimes the market is clearer if you look at the same time frames as the short trends, or take a longer term view to iron-out the short term choppiness.
- Scale back your trade size
- In extreme cases, I have seen people do the opposite of their trading signals, to really outsmart the market. Ie they buy when they would have sold and vice versa.
Let us remember two more things:
First, it’s been one of the worst years for hedge funds globally since the financial crises. So the markets really are choppy and not trending.
Second, even the best hedge funds, such as my mentor Bill Lipschutz who used to be Global Head of FX at Salomon Brothers when Warren Buffett was Chairman, makes money if correct only 4 times out of 10. How? By making sure the winning trades are big by adding to profitable positions and closing out losing ones quickly.
Also remember the greatest hedge funds manage sometimes to have not just losing months, but losing years – yet they are billionaires. The thing about billionaires is, they are not also ‘get rich quick’ strategists.
Alpesh Patel
