In all the current market chaos resides opportunity. However, no matter how experienced you are as a trader, there are still common mistakes you can avoid now to improve your returns.
1) Don’t panic, use protection. Panic is the vulture that sits on your shoulder. Don’t act indiscriminately and make sure you have established a plan to deal with the market as it gyrates. Consider protecting your investments by using the vertical collar strategy. The best place to put those on at the bounces in the market — usually the last place that you feel like buying protection, but usually the most advantageous. Insurance is cheap when the market is climbing. If this is an unknown strategy to you, ask your broker or investment advisor for details. If your investment company does not employ these protective tools, they probably have some investments that run inversely to the market. Don’t remain ignorant of how your investments are being managed. If you are managing your own portfolio, don’t be complacent about protection.
2) Avoid impatience. Many quality stocks rebound, but that takes time. Again, speak to your broker or financial advisor about using options as protection. If you have solid trading skills and understand market movement, you can place those yourself. You may also consider leveraged ETFs. However, those sometimes move quite rapidly in both directions, so you may end up going further in the hole.
3) Don’t forget to take time to learn the craft. The more you learn, the more successful you’ll be at managing events that seem unexpected to you. Keep on task about learning a specific strategy and a specific set of tools to implement. Learning too many strategies will cause confusion and make decision making difficult.
4) Don’t take this volatile time to LEARN to trade with real funds. This is the best time to paper trade, and leave your hard earned money alone. Though opportunities exist in the market, it is best left to the skilled to have their funds at risk. Learning to trade with live funds is dangerous at this time, and be warned that you will lose. Though trading is not horribly difficult, it is not an easy occupation, and we often overestimate our skills and abilities. Don’t learn this about yourself using real money – you won’t like the results.
5) If you are trading these markets, stay away from taking full sized positions. Trade 1/2 size and 1/4 size positions until the market settles down. With the whips, snapbacks, and long wicks, you’ll need smaller positions to ride out the short term trends you might be trading. Many seasoned professional traders like me are keeping size small and being overly cautious.
Anne-Marie Baiynd is the author of the new book The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology published by McGraw-Hill.