Last Update: August 2021

Hello, friends. This is Tyler Craig pinch-hitting for Greg, the captain of Canada, while he’s away. Let’s have some fun, eh?

Market volatility is on the top of my mind, and I suspect it may be giving some of the rookies (and, ahem, veterans) among us some heartburn. I’ve compiled my top tips and tricks for weathering the turmoil and will share them below.

First, commit now to figure out how to deal with market volatility so it’s no longer the boogeyman under the bed. Coming to terms with the whoops and whirls is a million times better than fearing them. You’ll be able to sleep better at night.

Second, how you deal with volatility depends in large part on what type of trading you’re engaged in. A swing trader will adjust differently than a credit spread seller who will adjust differently than a long-term investor. What works for one style may not work for another.

Today we’ll focus on a few general tips. Perhaps another time I’ll get into specifics on individual trading styles.

What was small is now BIG

Change your expectations for what is normal, my friend. Otherwise, you’ll be surprised on a daily basis. When the ATR explodes (which it has from $1.58 to $4.68 on SPY), you must ratchet your volatility forecast higher. This is why basing stop losses and the like off of ATR is smart. It’s an adaptive indicator that gives you more room as needed.

Or, if you think the ATR is too backward-looking and prefer to peer out the windshield, then use implied volatility instead. If you have the IV Rank indicator, it displays the expected daily dollar move based on what options are pricing in. Use the “Daily 1 SD +/- ” number as your guide. For example, SPY options are currently pricing in daily moves of $3.77 which translates into percentage moves of 1.4% (3.77/270.20).

With that as my guide, I’m now expecting the market to move 1.4% or less two-thirds of the time. The other third will see moves more than 1.4%.

Take Profits Quicker

Elevated volatility works to the upside and downside. As a result of the increase in two-sided action, the gains you have today could be gone tomorrow. So use favorable moves to your advantage by ringing the register quicker. If you’re afraid you may be missing out on bigger profits down the road if the swing extends itself then scale out. That is, take partial profits. Then if the market rudely reverses you’ll have at least locked in some of the hard-fought gains.

For example, with the market down four days in a row heading into Thursday, a short-seller might consider ringing the register on a portion of his bearish positions in case we see a vicious rebound.

Looser Stops + Smaller Positions

There are two ways to reduce the risk of your trade. Buy more shares with a tighter stop loss or fewer shares with a looser stop loss. In a volatile market, the latter is undoubtedly better. Otherwise, you’ll get whipped in and out of trades too frequently. To compensate for the wider stop, you can simply buy fewer shares to prevent the total risk of the trade from becoming too large. For example, maybe instead of buying 100 shares with a $2 stop, you buy 50 shares with a $4 stop.

The Sidelines Beckon

Being out of the market wishing you were in is much better than being in the market wishing you were out. Some traders may be best served by parking themselves on the sidelines until a healthier market returns. Cash is a position, and there’s nothing quite like the peace provided by a portfolio full of dough when the volatility monster is ravaging the landscape and eating the villagers.

Traders who keep their emotional capital intact will be poised to capitalize on the next bull market that emerges after the monster’s appetite has been sated.

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