A veteran trader describes six important ideas that he relies upon in his own trading to stay calm, focused, and committed even in the most volatile market conditions.

I want to provide you today with some ideas for withstanding and thriving in the whippy, volatile bearish market we find ourselves in currently. Even with 20+ years of experience trading (both professionally and personally), I often have to keep these kinds of concepts in mind, and times likes these are when we most need to keep our heads and minds cool and rational.

Push for a Systemized Approach over Emotion

All of us at our option trading firm have learned that a systemized approach to shorter-term trading (or even longer-term investing) is key for long-term success. Certainly, trading indicators, screens, and entire systems can be modified, optimized, altered, or even scrapped, but the key is having something that logically you understand and believe in (and with proven tested results, both backtested and live). 

That way when you enter a new trade position, you can do so with confidence and without letting negative emotions (or wishing/hoping/gambling) get in your way.  You may remember the famous Ron Popeil infomercial tag line "Set It and Forget It." To some degree, this would be an optimal motif for a trading system, whereby you collect your signals on a daily, weekly, or hourly basis and simply execute the trades.

And as Price Headley has long recommended, keep a trading journal that records all your trades, the reasons for entering, how they performed, how good were your entries/exits, and what can be learned from the trades. This allows you to look back at a record of your activity in black and white and can give you some detachment to evaluate without negative emotions creeping in (or even overconfidence when you have a hot run).

Also remember that a "systemized" approach does not just refer to short-term trading programs. It also can apply to all of your investments (allocations and distributions), assets, and even personal finances. Being organized and systematic will help curb emotions of things feeling out of control.

Consider Altering Your Trading Style, Technique, Duration, or Indicators

The technical indicators and charts we use for options trading are based on different time frames all the way from the one-minute intraday TICK charts to long-term monthly charts covering a decade or more. 

See related: Secrets of the NYSE TICK Indicator

When we enter very volatile times like we are currently in (the current VIX near 40 means that SPX options are priced as if the market could up or down 40% over the next 12 months), it may be advantageous to "tighten up" both the holding periods of your trades and also consider shortening your trading indicator inputs.

Being flexible to current market conditions while still maintaining your underlying systems/indicators/methods can be vital to long-term trading success. So, for example, if you are generally comfortable and successful using daily charts with acceleration bands and percent R re-tests and you begin to find it not working in the current market, you may want to look at shortening down to 60-minute intraday charts. 

And with that, you would look at shorter holding periods for your trades, as well. Or you can go the other way and focus on weekly charts and big-picture, longer-term trends (although the risk of drawdown there is often a concern).

Another alteration you can look into is narrowing or changing the basket of securities that you are tracking. There may be a new divergence emerging, or some security that had a positive correlative relationship to another security may have dissipated.

Also keep in mind that in most of the history of the stock market, bearish trends tend to be quicker in nature (and often more extreme) than bullish ones.  So when you have bearish trades on, you may want to look at locking up profits on them quicker, while bullish trades often can find longer-term trends to ride.

Keep Your Mental Game Clear

If you have a bad run of trading (which can happen during whipsaw markets like this), don’t let your mental stress ruin your "game." Take a step back, scale down the amount of contracts you trade, and try to view each new trade as a new independent event. 

It’s similar to the top defensive backs in the NFL. They may get burned badly for a touchdown, but the best players instantly forget the bad play and are immediately back "in the moment" on the next play.  They have confidence in themselves and their techniques/abilities (in the case of trading, this would be indicators, charts, signals, methods, and experience). 

Those that let the bad plays and the opposing team get into their head often find themselves riding the bench or out of the league.

If your mental state is not properly aligned due to stress (whether market, financial, personal, or from outside sources), back away from the market for a bit. Get some fresh air, listen to music, play with the kids, etc., and then come back to your charts and indicators with a fresh perspective. A clear mind is a more rational mind.

See related: How to Break a Trading Slump

NEXT: Know When the Best Trade is No Trade at All


Sometimes the Best Trade Is No Trade

Do not get caught in the mindset of "I just missed the best opportunity;" there will always be another profit opportunity, especially with the short-term focus and flexibility of options trading. And the flipside of "missing" a good opportunity is also "missing" a lot of huge losing trades. 

Remember, we can build wealth and profits in options trading on the up side, the down side, in a flat market, and in a volatile market. We can make directional bets, collect time premium, bank on ranges, etc., so don’t force trades. Don’t chase prices that have run away from you. Don’t trade just to trade. Keep powder dry in your arsenal for when the best opportunities present themselves.

Additionally, don’t get overconfident and "double up" when things are going well. Too often, when we get on a very good streak in one of our trade recommendation programs, we see and hear of clients who are increasing the amount in each trade by a big amount. Then when the streak of winning trades ends (which it inevitably will), those who have all their eggs in one basket (doubling and tripling up the amounts in each trade) may find themselves cleaning up a yolky mess. 

Study and Know Your History

Knowing your history will allow you to step back and figure out where we stand in the big picture.  Certainly some very unusual things are going on in the current environment (and really for over a decade now), but the history of markets and trading tends to repeat itself. 

We see cycles in the stock market that repeat themselves time and again (Fibonacci is one method based specifically on patterns).  And knowing market history can help you see the big picture during unusual times. 

A couple of timeless books that we can recommend on the history of markets, trading, bubbles, and panics are Extraordinary Popular Delusions & The Madness Of Crowds and Reminiscences of a Stock Operator.

For example, during the Internet bubble that culminated in 2001, I was a CBOE floor market maker and clearly saw that we were in the midst of a historic upside parabolic bubble. Consequently, while I took part in the upside, I made sure to take profits all the way up (and spent money on downside "insurance" that often ended up worthless), knowing it would end someday (and end badly). 

I was not caught holding the bag with a full portfolio of unrealized capital gains on worthless dot-com names when it all came crashing down. As an anecdotal example, even in my home state of Kentucky, I know of many "paper fortunes" in the stock of a one-time Internet high flier with a shady CEO disappear to nothing very quickly. Meanwhile, others cashed out at huge prices.

Similarly, during the real estate bubble and subsequent mortgage crisis, I clearly saw that prices in certain areas of the country were expanding at unsustainable rates. If you lived in a house that went from $300,000 in value to $1 million in about five years (such as in locations like Nevada, Florida, and California, for example), an alarm bell should have been ringing in your head telling you it was time to take some equity/profits out of the house and to lessen your debt and risk, not increase it. 

This is not an attack on those who have been hurt by the collapse in real estate prices; I have members of my own family who live in areas where highly inflated housing prices have basically collapsed, so I can sympathize.

As to the current market environment (or really what’s being going on since the market top of 2007 and the events of 2008), I would advise researching how the stock markets and various key sectors (currency, gold, bonds, and commodities) performed following historical events like the 1907 crash, the 1929 crash, and the 1989 Nikkei peak, among others. 

This will help to get some perspective on where we stand and may be heading, although certainly this is a different century and the rise of China and the other BRIICs (Brazil, Russia, India, Indonesia, China) may well forge a new global economic path. 

And remember that though these are not necessarily positive "bullish" historical events, through shorter-term trading using leveraged vehicles like options, there were and will continue to be plenty of profitable and attractive risk/reward opportunities in the coming days, weeks, months, and years in both directions.

Keep Your Head Cool in Times of Stress

Going back to the original premise of this article, it’s important to respect the concept of maintaining a clear, rational, confident thought process while others are succumbing to panic, fear, or greed. To use another sports analogy, think of how quarterback Tom Brady dissects the opponent’s defensive scheme and quickly targets opportunities in the midst of chaos. Meanwhile, how many mediocre NFL QBs have we seen who panic and make a terrible decision or two under pressure that costs their team the game? 

A trading example (which we’ve all had) is letting one big losing trade wipe out several winners due to a lack of discipline or execution, or letting emotions like hope and wish get in the way.

Another positive example, in my view, is seen in some of the most iconic movie stars and fictional characters of all time. These "manly" prototypes (not to be sexist to the growing group of female traders and investors out there…this can apply to anyone) usually do the “right” thing in times of high pressure, and they make it look easy (which may take some practice).

Take Clint Eastwood in most of his roles: steely eyed, just, and clinical even against big odds or when things look bleak. Or look at the character of James Bond, which has seen nearly 50 years of global popularity: the epitome of cool under pressure, able to go instantly from a tuxedo party to an underwater harpoon fight. 

In terms of trading, the way I would compare characters like these is not to say that you must take down the bad guys or save the town; it’s more that they exude a cool competence and confidence (intelligence/logic is an important factor) that allows them to thrive in times of pressure.

By Moby Waller of BigTrends.com