Volatility and long term trades – be patient and not greedy
Volatility can be really bad for your long time performance. Before you can think, the market hits your stop only to bounce back a few minutes later.
The flash crash on May 6th was an awful example for this.
If your stop is close, you will surely get kicked out in one volatile move. But if you enlarge your stop too much, you hurt your Riskmanagement. A loss that’s too high for your account.
But how can our positions survive a volatile phase?
One of the solutions is position sizing.
It is no problem to enlarge your stop, but don’t enlarge risk. Define the Risk you take in your whole portfolio. Calculate the worst case and look at your account. The worst hit you have to take if it goes against you shouldn’t be high enough to hurt your account seriously. Best is, if you have gains in your account, you can take them as a risk bumper.
For example:
You have 100 HOG (Harley Davidson Inc.) in your Portfolio with a risk of 3$ per share (2 x Daily ATR). So, you would lose 300$ if your stop gets hit. Now even if the market is very volatile, but your trading idea for this stock is still valid stick to it.
Enlarge the stop to maybe 6$ a share and trade only 50 shares of HOG.
This will minimize your risk. But also, and that’s true, it will minimize your gains.
But sometimes it is more important to minimize risk and keep good stocks in your portfolio, instead of heading for fast and mostly little gains.
If you can keep your stocks during turbulent times, you will be in the position when the market rallies again with a strong trend and that is the time you build up your position.
This will keep your portfolio prepared for bad times.
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