Three Simple Steps to Trading Volatility

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I recently sent you a special video where I addressed the current state of the markets.

But today, I want to focus on something a little different.

Now we all know that 2018 has been a year fueled by volatility.

And many have found themselves watching from the sidelines as investors rode the wave of uncertainty.

That’s why today I want to talk about how to win in even the most volatile markets…

And all you have to do is follow these three simple steps….

Here’s How to Come Out on Top in Any market Volatility

While many things can be attributed to the unruly market – at the moment there’s two heavy hitters.

1. Earnings. 

Today wasn’t a normal day on the earnings per share (eps) reporting front.

Typically, when earnings comes out and a company meets or beats expectations – the stock sees a pop in price. There may be some selling on the news, creating a bit of a dip, but it tends to come back.

In turn, it isn’t uncommon to see this price action lift the market as investors take this eps report as a good sign – buying into other companies in the same sector hoping for the same result.

But today – that wasn’t the case.

Look at 3M (MMM) for example…

They beat their expectations all around, but guided lower and the stock sold off over 8%.

And major DOW component Caterpillar (CAT) beat eps and revenue projections and went from up 6 to down 7-points.

This kind of movement in the market might be a case of investors having already priced in expectations – so we’re finding ourselves in a “sell the news” environment.

2. Bonds

There are times where we see an inverse relationship between equities and bonds. The way to assess your best move depends on where investors see a better gains opportunities.  If a treasury bond can yield a higher annual return over the dividend of a stock through the same period, bonds would be favored. But if one sees equity share growth and a dividend outperforming the annual return on a bond, the equities should would be the move to make.

Typically, when money is flowing into one asset class – its money coming out of another.

The ten-year Treasury note hit 3% for the first time since 2014.  Also note, the two-year Treasury note hit a multi-year high of 2.5% today.

Corporate earnings are tracking at 18% higher, but with rising bond yields and rising inflation — it looks like investors are hesitant to stay as bullish as they once were, and these wild swings may continue despite what happens on the earnings front.

But despite the crazy swings and uncertainty – you can still find yourself on stable ground – and here’s how.

Here’s How You trade Through Volatility

1. Don’t Panic

The worst thing you can do to your portfolio is to make any kind of trading or investing decision in a knee-jerk reaction to whatever’s triggered uncertainty in the markets. So never deviate from your long term strategy.

Short term drawdowns are just that – short term.

2. Tighten your trades

Less right equals less loss – and over a volatile period in the markets, you may want this kind of protection.

For example, let’s say you have $1,000,000.  Do you keep 40% cash and put the remaining 60% to work in other investments and trading? And that’s just one of the many questions you should ask yourself.

And once you have those numbers, you should have a risk profile for each and a target expectation of what you want to accomplish profits wise.

By adhering to this plan, you’ll know if you’re reaching your goals.

Now, I typically don’t have more than 20% risk across everything – but this is what works for me. Risk assessment is different for everyone. This would be a great thing to discuss with your broker or financial advisor.

3. Create portfolio protection

In a falling market – always consider using put spreads (or “Loophole Put Spreads” as I like to call them) on market averages such as the SPDR S&P 500 ETF (SPY).

Spreads offer us protection and less risk when the markets turn sideways.

Talk to your broker about spread trades and see if they fit your portfolio and trading style.

Now, the best way to learn how to put these practices into play is by following along with my Cash Course.

This is a simple-to-follow, seven-part video series where I give you a step-by-step walkthrough for setting up a trading account.

I’ll tell you everything you need to know about making money from stocks, ETFs, options, everything.

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It is that easy.

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That’s all for now,

Tom Gentile
America’s #1 Pattern Trader

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