skip to main content
Trading Education Posted by Team Topstep March 8, 2022

How To Respond to Volatility’s Knockout Punch

Knockout Punch

If you trade just about any asset class in the global markets, you have more than likely had to navigate through moderate to extreme volatility. For example, the ripple effect of the Russian attack on Ukraine has prompted wild swings in equity markets as the world assesses its risk assets. 

Given the global flux, currency markets have also seen enormous swings, especially the Russian ruble. Furthermore, commodity markets like crude oil and grains have seen a dramatic price action, not merely due to currency fluctuations but also because of the supply and demand of products.

While many traders tend to grow tired of dull markets and eagerly anticipate volatility, the zero-sum trading game still dictates that there is a loser for every winner. If you have benefited from the recent volatility, then I say congratulations. However, both new and experienced traders have suffered in varying degrees due to the wild market swings in recent days.

Let’s face it; there is not a single trader who didn’t lose during times of volatility at some point in their career. If that’s you in recent days, you may be discouraged, thinking of giving up, or uncertain of how to rebound. Well, you are not alone!

If you feel less sure in the weeks to come and find yourself searching for some friendly advice to help recover from big losses during high volatility, then this article is for you. A few common-sense themes serve as critical reminders of how you can remain grounded and set yourself up to rebound following a disappointing trading period.

How To Respond to Volatility’s Knockout Punch 

You are Not Alone

First, realize that every trader endures the pains and disappointment you are experiencing. Even successful traders have had to manage through seasons like this. Therefore, your current obstacle does not necessarily mean that trading isn’t for you; it could be that it’s a growing pain or perhaps even a rite of passage to get where you are going. 

I’m not trying to give you a “silver lining” regarding your losses. The only potential for such optimism comes if you reap the lessons from your failures (later addressed). Instead, I am affirming that your experience is part of a natural, albeit hurtful, process.

Learn the Lessons

This phrase is probably one of the last things any of us want to hear when enduring a period of losses. However, traders who ultimately prove successful begin to discern lessons from these losses. The result is the enhancement of trading systems and indicators, but most important is self-evaluation of your psychological state. What I mean is that you must take inventory of your mental and emotional health, including the factors that led to recent losses. 

You will need to create some psychological health exercises to help you overcome and trade again instead of feeling “snake-bitten.” I know this is easier said than done, and it’s challenging to be specific because each person is different. Yet, if you want to rebound, this is a critical step, and it’s the best way to ensure it doesn’t occur again.

Move On

Following devastating losses or any period of trading disappointments, it can be difficult to let it go. It can be challenging for some to sleep; for many, the constant revisiting of losses plagues their minds; and others hampered by the memory of prior losses every time they trade. This, in turn, hinders current opportunities. 

While we must process our losses enough to benefit from the lessons, it is still imperative that we move on. Unfortunately, I cannot tell you how to do this, as we all have different methods. Sometimes, simply taking a break (see #4) will be sufficient. For others, talking to somebody concerning their disappointments is helpful.

Meanwhile, others benefit from spiritual discipline – yes, perhaps even praying. Self-discovery is critical in the life of a trader, and opportunities for reflection are constantly within our grasp. Accordingly, we all must learn the best way to move on after a challenging trading week.

Take a Breather

This will be no problem for some of you since the last thing you want to do is look at screens after big losses. However, others find the most natural thing is to shrug it off and start pushing order buttons again. While one can admire such a spirit, you should at least consider if you need some time away. It doesn’t have to be a month, a week, or even more than a day, but whatever time you need to process what has happened, you should take it to be able to shrug it off truly. 

Take time to enjoy yourself. Create fresh good memories to offset your bad memories from the past few days. The key to success is longevity. Consistently taking time for self-care is as vital as risk management in your trading account. In addition, a little R&R will enable you to re-energize and engage the markets from a position of strength.

5 Ways To Help You Adjust Appropriately

Having now engaged in some good self-care, including psychological, physical, mental, and emotional ways to counter a disappointing trade, we will now examine some methods that could be helpful to consider as you adjust for future success. Of course, again, each of you will have to weigh these differently, but these tips are an excellent place to start. 

  1. Trade smaller during periods of volatility. The smaller the size, the more limited the profit potential and the risk. If you suffer psychologically during volatility, taking on smaller-sized trades is one way to keep your psyche in check, which means you are more likely to stick to your rules.
  2. Trade for longer durations. In volatility, if you catch a trend, you should have a much larger target. When the market’s range is twice as broad as usual, your targets should also expand. This way, when you catch winners, you can potentially eliminate the impact of several smaller losers.
  3. Widen your stop loss (if you are trading with a smaller size). With many mini and micro products available, traders can easily manage their risk. If you are trading with larger targets, you can utilize smaller sizes and then use a slightly wider stop loss to avoid getting so quickly taken out by the market. This is a justified way of negotiating stops, unlike the following example.
  4. Never compromise your risk management! The problem with volatility trading is that markets are moving much faster than usual. Your brain is used to making decisions quickly during normal market conditions; however, your mind cannot adapt quickly enough during times of wild swings. As a result, many traders negotiate their risk by moving stop orders or taking wider stops, which becomes detrimental. The truth is that while volatility may bring out the best profit potential, the unfortunate side of the double-edged sword is that it often brings out a trader’s worst habits.
  5. Consider your risk to reward ratio. As I have consulted with new traders and others attempting to move on to the next level, one of the first things I frequently examine is their risk to reward. Surprisingly, I see many traders who risk 1 to earn 1. But, more notably, I observe traders who risk more, sometimes considerably more, than what they target. Remember, the more your risk exceeds your target, the greater your win percentage must be. 

When the losing streak inevitably comes, it becomes an enormous challenge to ever return to where you were before the winning streak if you are risking more than you are targeting. This is especially the case in volatile times. If you assume the risk of these environments, you might consider how to target a return of 5:1 on risk. This is what makes volatility trading worthwhile.

Start Talking About It

This article hardly scratches the surface of responses to a disappointing trading session. Still, it does start the conversation and hopefully prompts you to reflect on how to respond going forward. Remember, these challenges occur to us all; and to enjoy long-term success, you must employ an appropriate strategy and then trust the process. 

It’s also good to have someone who is experienced and perceptive to open yourself up to and converse with. Sometimes, absorbing the ideas of others is paramount, and even if their input doesn’t give you the key ingredient you need, engaging in conversation still permits you to listen to your own voice and think about things in new ways.

What are your challenges during high volatility sessions and the lessons you learned in the process? Then, as a community, we can lean on each other. Until next time, trade well!