How to deal with an uncertain market

Time horizons

Most traders have a short-term horizon and look to enter into a trade with the objective of coming away shortly after with a big profit.

While those big and quick profits do occur (e.g. WORK and EDIT gave about 50% and 110% gains in just two weeks), they are not the norm.

When to trade and when to stand aside
Knowing when to trade and when not to trade are important factors in making profit long term.
Trying to trade for short-term gains during high levels of volatility is very risky and is unlikely to be an ongoing replicable strategy of success.

However, trading/investing for long-term growth during volatile periods does offer a higher degree of success.

That assumes the market moves in the desired direction.

A point to note on that is many traders will often hold on to losing trades that were originally short-term positions that turned to big losing trades and now are being called 'long-term investments’.

An honest appraisal of the trade needs to be made and if a short-term trade has gone wrong then it should be axed - not renamed.

Lack of clarity
Now the problem with high volatility is the lack of direction and fear that is in the market - which presents a lack of clarity.

It is actually simpler to make money in a bear market as fear takes over and price falls far more quickly than price rises in a bull market.

However, in the long run, the markets tend to move up.
Since the Great Depression in 1929, the Dow Jones has moved up 84,000%.

So how are we dealing with an uncertain market?
There is always a degree of uncertainty in the markets, regardless of when the entry is.

When volume and volatility increases, that makes for a more uncertain market and that is where we are now.

We entered a long position on Nasdaq 100 on Friday and there is no guarantee that trade will do well.
In fact, it is more probable that trade will fail and do badly.

So why did we enter it?
Because the risk was low at the time.

We have an exit strategy but we also know and had to incorporate the risk of increased volume and volatility, which we happened to see at the start of yesterday.

If we start to see weakness, we will short the market.

The purpose initially will be that of decreasing the drawdown in our books by offsetting some of the weakness in our long-term investments.
However, if the market begins to worsen, we will add to those short positions.

Core stocks
At present, we have almost our core holding of stocks.
These are stocks we want through thick and thin and, if the market was bear driven, we would like to keep the stock positions - but may reduce their position sizes.

So our process is to start with rebalancing our books - which began three months ago - then add to our core positions - then wait for a 10% correction.

The correction happened yesterday and now we can start to consider where we want to place sell stops to short this market (should it move down).

Again, the purpose today is to reduce the drawdown on our equity curve - but should that drawdown duration continue, we will look to add more shorts.

Let's go trade!