Are you still rattled? Have you had enough of this wicked market action? The markets are still continuing to be extremely volatile and this is causing a lot of heartburn for us rookies and the professionals as well. As we talked about last week the extreme volatility has been messing with most long term perspective trading plans and this is not restricted to just us retail traders. I have been reading lately about certain hedge funds that are falling victim to the recent market action. So if these big players are struggling to deal with these markets what does that mean for us little fish?

This week we are going to talk about the things we need to do in order to keep our sanity in these wild markets. We are also going to answer a question from the bullish crowd that has been echoed to me at least 100 times this week alone. That question from the folks who only use the bull side of the market to make money are asking….”When is it safe to go back in the water?” Ok, I am paraphrasing their actual question which is “when can buy stocks again?” That’s the eternal trading/investing question isn’t it? When should I get into or out of the markets? Those who have chosen not to get educated also usually ask what should I buy and when should I buy it. In my humble opinion, those folks are destined to live and die by the whims of the markets, however, that is not us here at Tackle Trading! We choose to be masters of our own fates and not let the market take a bite of us!

The way we get to choose our own fate is by doing a few very important things and here they are in order of importance.

1. We plan! We have talked about this before in this blog but it bears repeating, especially because of what we are seeing in the markets right now. We need to plan several things. We need to plan to be successful which means we need to take any system we are choosing to use and run it through all scenarios to see if it has the mathematics to actually survive the above-mentioned scenarios. We need to backtest in as many market conditions as possible to see if the system we have chosen to deploy still holds water under crazy volatility conditions like these. Now the cold hard reality is that most systems are going to break under these types of conditions but it is our planning that will tell us under what conditions do we need to see to get out of the system so that we can live to fight another day. Failure to plan for all scenarios will result in catastrophe and therefore there must be a tonne of focus put into this planning endeavor. If you need to see evidence of how important this is just google the story about optionsellers.com you will see that this hedge fund failed to plan for extreme volatility and paid the ultimate price. This doesn’t have to be you! You can learn from other’s mistakes as well as your own.
2. We control our temperament! If we have successfully fettered out all scenarios for our system and we know without a shadow of a doubt that our system has a positive expectancy and we trust in our numbers then we can calm ourselves in these turbulent times knowing that the skies will eventually clear up and we will let odds and probabilities take over and right the ship. I have just said this but I will also say that this is one of the most difficult things to do but that it is imperative to long term success to get into a state of calm when all heck is breaking loose. I can tell you from experience that sitting back and watching your positions fall day after day to levels one thought impossible is not fun but if you have a plan in place that accounts for these scenarios then you will find it just slightly easier to get into a state of zen and also your calm temperament will help you prepare for golden opportunities that present themselves after the carnage is over. A small example of this quiet temperament could be if you decided to model your trading/investing style after Warren Buffett and you have chosen world-class businesses to buy and never sell and then learned to cash flow then as long as you have done your homework on your plan and system then you should be able to get yourself to a state of zen and be ok.
3. We learn! There is no one that knows everything and it is these times that show us glaring holes in our game. That might be a position size that is way too big or maybe a misstep in our planning process, for example, not having a solid set of instructions in place to adjust a trade and control the risk in that trade. It is these swift steady declines that show us if we are truly prepared for all market types and from the comments, I have received from some folks in the trading world this week there are lots of people that are very much underprepared. We need to take this opportunity and learn more so that we can be better, stronger and faster for the next time the market changes.

The above items are things we need to do to get better at what we do. This covers the first part of this blog for this week. These are actionable items that anyone who chooses to become a better trader can do and should do. The second thing I wanted to cover this week was the question from our bullish friends. When can we go back in the water? As you can see from the Jaws reference above that this a common fear for a lot of people. I believe for some people who choose not to follow the path we laid out in the first part of this blog that is will never be safe for them to go back in but for those of us that choose to work on themselves then I would answer the question this way…its only safe to go back in the water once you have exhausted all the items we mentioned. Once you have planned, controlled your temperament and learned then you can look at going back in the water! This answer is more philosophical than most folks are looking for and there is a technical answer as well and that is when the market can prove that it has decided the new way is up then and only then is it ok to go back into the water. If you are a trend follower then you know we need to see a series of higher highs and higher lows on the chart before we go back in. I would also add that dipping a toe in the water is smarter than diving in headfirst.

So feel free to go swimming back in the markets but only after you have learned to swim and have a rescue plan in place.

Be Well and Avoid the BITE!!!

Coach Holmes.