5 Tips for Trading Whippy Markets

08/30/2011 9:00 am EST

Focus: STRATEGIES

Adapting in these challenging market conditions is crucial for staying safe and profitable. Here are five important strategic adjustments, as recommended by a 35-year market veteran.

These volatile markets demand we approach new trades with extreme care and manage existing trades with kid gloves.

In more than 35 years as a futures industry professional, I have only witnessed markets like these a few times. Having come from the floor-trading side of the business, I can you tell some very harrowing stories, but let’s focus on today’s markets instead.

Trade E-mini (ES) Contracts

Those of you who trade one regular-sized contract should look into trading mini contracts. One contract is difficult enough to trade under normal circumstances. You are either in the market or out. If you buy or sell the quantity of mini contracts equal to one full-sized contract, it allows you to market your position. You can cover a portion and hold a portion and place stops on the balance. You get more “bang for your buck.”

See video: E-mini Trading Made Easy

Buy Strong, Sell Weak

Volatility has caused option premiums to skyrocket. If you must trade options, bull call spreads or bear put spreads are the best way to limit your risk.

Buying strength and selling weakness can be the correct way to approach a trade. However, at this time, I would buy weakness and sell strength. If you want to be long, wait for a retracement to the downside before you buy.

Conversely, if you want to be short, wait for a retracement to the upside before you sell. By approaching the markets in this fashion, you will be buying the weakness of the strength or selling the strength of the weakness. Sounds strange, but approaching the markets in this fashion helps place the odds in your favor.

Place Stops Carefully

Stop placement is an art even in typical times. Placing stops just below recent lows or just above recent highs is a sure way to get stopped out of a trade. Place sell stops below support, and buy stops above resistance instead.

See related: How to Place an Objective Stop Loss

Use RSI as an Indicator

Use of technical analysis in your trading is a must. I have made use of technical analysis since 1976. It is most helpful in keeping traders out of danger. Learn to analyze bar charts. Learn to read charts of various time frames. Know your basic technical indicators.

Relative strength (RSI) is a very useful indicator, but not in the way many trader use it. It is not as useful as an overbought/oversold indicator, but instead as a directional one. Above 50%, expect the market to move higher; below 50%, expect the market to move lower. This isn’t a textbook explanation, but I find it to be quite useful.

See related: Getting the Most Out of RSI

If you don’t know how to calculate Fibonacci retracements, learn. The retracement areas are just the thing to use for as guideposts for entering or exiting trades.

Find the technical indicators you feel most comfortable with. It is important to trust your approach to trading. Sure, there will be losers, but if you approach trading as a science, you will have a much better chance of success.

Use the Commitment of Traders (COT) Report

Keep a close watch on the Commodity Futures Trading Commission (CFTC) Commitment of Traders (COT) report. Released each Friday, this is information the government wants traders to know. (Click here to receive the free report.) 

The information can be dated but very helpful. The report includes information from Wednesday through Tuesday. There are services that analyze the data for you, but I’d recommend you get comfortable with the data and do it yourself.

See video: Using the Commitment of Traders (COT) Report

By Robin Rosenberg, lead analyst for soft commodities, PFGBEST Research

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