Trading Volatile Markets

Everybody has felt the US Subprime crash, or the “credit crunch”. It has affected all of the major stock markets in the world, hit some of the largest investment banks and crippled other financial organizations who focus in the lending space both large and small.

There are a couple of things one can do in this time of news driven, manic volatility to help reduce risk and losses.

“Reduce your position sizes, move your stops further away on long-term trades while keeping them tight for day trades, take profits on short-term trades for frequently, and be more patient with longer term positions”

Day Trade

In times like this, the gaps stocks can experience can be literally ridiculous. On the ASX for instance, Macquarie Bank (MBL.AX) experienced movements of 5-8% over night! For Australia’s largest and most prosperous investment bank, that has close to no exposure to the US subprime markets, movements like this can seriously damage a CFD traders portfolio (trust me I know). But I suppose that is to be expected when trading thought the most volatile period our markets have experienced in 15 years.

An easy way to combat these leaps in price is to close out at the end of the day. Yes, you may be cheating your self out of potential profit, but in this type of market, even the savviest trader cannot pick the intra-day movements of the US markets… Collecting profits, dodging the overnight movements and reopening positions after analyzing overnight movements in the overseas markets can be one of the most effective ways to navigate through these treacherous times.

The Overseas Markets

As an Australian trader it is common knowledge that what the US market does will drastically affect what our market does. This can be easily obtained by looking at a comparison of the Australian stock exchange against the US. This great influence, even more so in this time of market volatility, adjusting your stops according to overnight movements in the US market is utterly necessary.

This means waking up every morning and checking your stop against the movements in the overnight market, and ADJUSTING them based on what happened over night. This means taking wider stops to ensure you don’t close out of your position at a ridiculously low price because of wise spread panic, sometimes it might mean removing your stop all together, if you have a long term trade in place.

Large intraday spikes that cause prices to hit your stop can be a CFD trader’s worst nightmare, don’t let it be yours.