TheRiskBlog

At the moment it is very difficult to stay with the markets at all times. We are seeing high volatility throughout the markets. This is very helpful if you can deal with it correctly, but it doesn´t help when you are beginning and don´t quite know how to cope with risk.

On the other hand there is always opportunity out there. We as traders need to be able to find it and we can, it is not all that difficult. To be able to spot a good trade we first need to make sure that we understand what´s going on in the markets. Are the market participients scared or are they euphoric? Is there optimism in the market or does everybody think the world will stop turning tomorrow?…

So we need to find out what everybody else thinks about the market. How can we do that?

• First of all, listen to yourself. If the market went up for 4 days in a row and you still expect it to go up today as well be careful with your positions. If you feel, that this scenario will not present itself it might be a good idea to protect your long positions by using profit management stops.
• Always think about what the other side is doing. Let´s assume a stock went up a couple of weeks and for the last 3 days it has fallen considerably. In this case try to find out what the guys might do, who are still long in the stock. Basically just imagine, you were long with the better part of your investing capital, how far would you let the stock drop? Does hope play a role in it? At what point would you stop hoping and sell the position?

Let´s have a look at the current situation. We are in a crisis. But markets are doing well and they kept rising for weeks. You are long and you built up on your positions. So most of your trading capital is in the market. How do you know how long the market keeps rising? Well you don´t and you don´t need to either. If the market is in trendmode ans has done very well over the last couple of weeks all you need to do is expecting the opposite. Just start protecting your positions. Put some stops in the market.

Last year hedge fund managers, big investors and wealthy individuals all took money out of the markets. Where did they put it? Most of it was parked in safe heaven positions.
But all of this market participients have a problem now. When the markets begin to rise, they need to put that money back into it, because they need to earn money again. Whar are their emotions? Very simple they get scared they might miss something. So they will keep on pushing money back into the markets.

We can participate. We just have to go long but keep our stops very close to the market, so that we get stopped out the moment, that market turns around.

Since we only trade two basic emotions in the market, those two being greed and fear we only have to find out which prevails at the moment.

Let´s look at this again. What will happen, the moment this rally is over and the market starts going down again. Very easy, most investors who were in early will fear losing their gains, so they will stop out to protect the gains. Which in turn means selling will pick up and it will pick up fast so we will see a steep drop in the markets. We don´t know when this will happen but when it happens we know we will a have a few days of short selling. This is how we will feel the markets.