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Trading Education Posted by Team Topstep March 22, 2022

Running the Bases After Hitting a Volatility Homerun


Regardless of which markets you trade, you have undoubtedly observed some very volatile trading in the most recent few weeks. The Russian invasion of Ukraine has created systemic risks on global equity markets and currencies and commodities, including crude oil, grains, and gold. In addition, other global factors have increased volatility, including recent central bank posturing; meanwhile, underlying concerns of inflation still grip the minds of many concerning a potential recession.

Following these periods of volatility, traders often feel failed and frustrated. I encourage you to view my most recent article highlighting ways to rebound from volatility’s knockout punch if this sounds like you.

However, some traders have navigated the recent volatility surge successfully. Not only that, but some of you reading this have probably hit some profit home runs that you have celebrated.

If you fall into the category of recent success, then I applaud and congratulate you. However, you must consider some critical elements as you continue to approach the markets in the coming weeks.

One famous and successful trader frequently asserted that his largest losses often came after his most substantial wins. So think about it; there must be something in achieving success that can set us up for failure.

The important thing is to be aware of the vulnerabilities that success brings. Today’s article highlights how traders who have recently hit volatility home runs might ensure that they remain on top.

7 Considerations After A Big Winning Day

Many times on the baseball diamond, there is a certain etiquette, sometimes referred to as the unspoken rules of baseball. One such rule is that when a batter slaps a homerun, they should keep their head down and begin trotting the bases rather than flinging the bat and staring at the ball as it crosses the fence. Pitchers see the latter as highly disrespectful, and breaking this etiquette can often result in a pitcher throwing an intentional hit at a subsequent batter.

Today, we will examine how to respond if you have been hitting home runs as of late.

Take A Break

I mention this strategy first because it is likely the least endorsed by my readers and is subject to pushback. However, if you’ve had a good winning streak, it may be best to step away. Yes, the potential negative is that you are walking away from a “hot hand.” But remember how casinos often work. They want to keep successful gamblers engaged at the tables during a winning streak to set them up for an eventual fall. So knowing when to walk away is crucial to successful living, even in trading. 

You may miss out on additional profit; however, you will retain your home run, and you might also avoid the mistakes that many of us are prone to making following a winning streak. If you need a refresher on these mistakes, then keep reading.

Don’t Get Too Comfortable

This is crucial. Sometimes comfort results in a dull blade. We can quickly lose our trading edge when we become comfortable. This is more common sense than profound trading wisdom; however, I’ve seen time, and again traders begin to grow comfortable after a winning streak, even to the extent that they take future gains for granted. 

When we assume victory, we often lose our specific approach to game planning. This is why the best coaches in sports are motivators that do not permit their teams to take any opponent lightly. Right now in the United States, it is time for March Madness, and it’s common for a high-seeded basketball team will treat a lesser team as a lightweight, and upsets occur every year.

Don’t Become Over-Confident

Yes, this aligns with the previous statement but with additional nuances. Too many times, I’ve seen traders let volatility victories make them think they are something of a genius trader. Humility is the recipe for longevity; meanwhile, arrogance is the ingredient for blowing up your account on the next round. So rather than assuming yourself to be a master trader, it’s important to realize that if you do not humble yourself, eventually, your P/L statement will!

Consider Your Trading Vulnerabilities

Okay, even if you were successful in recent volatility, it doesn’t mean there is nothing to learn. The best traders are like the best companies. They are not content with the mere victory but see true excellence as continually evaluating every potential weakness. A fair and honest self-assessment is necessary even after a big win streak.

Was It Luck or Sustainability?

None of us want to face this question, but the most honest and straightforward approach after a big victory is to ask, Was it luck? Can I repeat it? Sometimes the answer is no. If so, the more quickly you can identify that reality, the better protected you will be. Otherwise, you may attempt to repeat the same method with potentially detrimental results. 

Sometimes a huge win doesn’t mean that we are any better than we were before the streak; it just means that we caught the perfect storm of opportunity. This should be celebrated; however, you should be quick to acknowledge it if this is not sustainable behavior.

How can you improve?

This one aligns with the previous ideas but frames the question a little differently. No matter how successful your win streak may have been, still, ask the question, how might you improve? The key to longevity is to have a short memory of victories and a long memory of defeat. This will enable you to turn your losers into eventual psychological winners, hopefully translating to profitable trades. 

Meanwhile, this approach also enables you to detach from the tunnel vision of victory. What could you have done differently to have improved your winnings? Accordingly, were you merely lucky, one wrong step away from significant defeat? An honest assessment will put you on the right track toward long-term winning behavior.

Will You Be Ready For a Seasonal Slowdown?

This last one is important to remember – we don’t know how long this current volatility spike will last. But for many successful volatility traders, it never lasts long enough. Oftentimes, before we know it, the markets have shrugged off that behavior and returned to a very quiet posture. So now that we are approaching spring, seasonally speaking, there may be a slow down in price action.

Regardless of when a market slowdown may come, the important factor is whether you are ready for a sudden or gradual change in market personality. If you try to maintain what works in times of volatility during a milder market, you may have to give back your gains. The ability to be forward-thinking is a key component of sustainability.

In Closing

These are some simple methods of self-reflection to remember following a period of successfully trading volatility. This is not a definitive list, but these questions should prompt further self-exploration to help you come up with your own ideas. 

Remember to balance your victory by guarding against defeat appropriately. My hope is that your success will continue in the days and weeks to come. Let us know on one of our social channels what you are doing to ensure that you stay primed and ready for market action. Until next time, trade well!