How to maneuver volatility in the market

Like adapting to the weather…

They always say, “Sell in May, and go away.” We hear phrases and sayings like this frequently. While we never know if they’ll come through, they’re good to keep in the back of your mind.

Why?

Because, to some extent, they can be a self-fulfilling prophecy.

“Uh oh…it’s May! Sell in May and go away.” And then, selling begets more selling.

Here’s why I’m telling you this (plus, a trade that’ll work in these market conditions)…

The high in the S&P was made on May 1st at $2961.25, and we’ve subsequently fallen $161 points, before finding support at the key psychological value at $2800.

Since that time, we’ve experienced more volatility than what we’ve seen throughout 2019. For many traders who may have only been trading a few months, it may have smacked you in the face.

However, it’s important to learn to adapt to a variety of market situations, and learn how to wade the waters.

I equate the market conditions to being similar to the weather — and learning how to manage that, and adapt to it, determines how successful our trading is. I trade differently during market volatility than I do in a consistent uptrend.

Think of it this way: Though I prefer the summertime with clear blue skies and lots of lake time, I still have to entertain myself the other three seasons of the year, right? It’s the same with trading. You must learn different skill sets for varying market conditions.

You may not know this, but lately I’ve taken up gardening. I find it a great stress reliever, particularly with the extra stress that a volatile market induces. I also love spending time outdoors with my son, as he absolutely loves digging in the dirt, looking for bugs, and playing with his lizards.

So, as a result of my weekend efforts, we have a full on vegetable garden, complete with Leo’s own pumpkin patch.

As such, lately I’ve been equating my trades and the market to that of the weather and my vegetable garden.

Yesterday, here in Texas, it was 95 degrees and my newly planted pumpkin patch was suffering in the heat. But of course, we know what to do about that. A nice watering and some attention and it’s good to go today.

However, when I woke up this morning, the clear, sunny skies were long gone and I was racing outside to save my garden from the wind and ferocious rain. I was immediately soaked and I had vegetables strewn all over my deck. This wasn’t what I was expecting to wake up to.

Thankfully, I managed to rescue the tomatoes and the lizards were all still in their cage. And now, looking outside 6 hours later, it’s 80 degrees and there isn’t a cloud in the sky. Leo was also happy with the outcome…

How does this Texas weather, garden debacle relate to the market?

The next time you wake up, and look at the S&P’s, and you see that the market has gapped down overnight due to the latest Trump Tweet or escalation in the trade war, remember this story.

While at the time, it may seem like the end of the world (and you’re running around soaking wet), the clouds will clear out and the sun is going to shine again.

In the meantime, we recognize that the weather, and the market, is pretty crazy right now. Likely it’ll remain this way until the trade war comes to a resolution and the technicals on the indexes recover above the overhead resistance.

One of my favorite trades to do in this market environment?

The opening $TICK gap fade trade. This is a futures trade that takes advantage of everyone panicking at the open, after a gap down. Don’t be that person. Instead, know that the weather will change, likely quickly, and look for opportunities.

Here’s one of my favorites:

A freebie for you. While I wrote this up long ago before I worked here, it’s still 100% valid today. It’s a trade I do all the time. I actually learned this trade from Neil Yeager, one of the key analysts in our Simpler Futures chatroom, though he makes appearances in Options as well.

Check out the download here.

(You may notice that this has our old logos back from 2016. This document is a big part of the story about how I started learning to trade futures, and how I got my job here at Simpler Trading. I’ll tell you that story in a future issue.)

If you’d like more information, I discuss this trade, along with many of my other futures trades such as the opening range breach, 12:30 trade, and 2:30 $tick trade in my Futures Freedom class I taught last year. You can grab all that here.

Remember, different strategies, setups, time frames, and risk parameters are necessary during varying market conditions. You don’t need to know ‘everything’ there is to know about the market to make money, but you do need key methods you go to during varying times.

What is your favorite setup right now? I’d love to chat about it down below.

2 thoughts on “How to maneuver volatility in the market”

  1. Danielle, thanks for all the helpful information you post. I enjoy learning from you and the others at Simpler Trading; although, I still have a long way to go. This is off-topic, but I have one quick question that I don’t think I’ve seen addressed anywhere. When you are trading options, how do you set your stop loss? Do you do a conditional trade based on the price of the stock or do you just use the price of the option?

    Thanks,
    Chris

    Reply
    • Hey Chris,

      Thanks for your question. I know there are many people that do it based on the price of the option (for example a 25% stop loss), however I find that it doesn’t really give you accurate results on trades. For example, if you get in late, and you’re chasing, and then you set a 25% stop loss, you’re likely to get stopped out in a normal pullback – one that didn’t really need a stop.

      For this reason, I like to set stops based on specific levels on the underlying stock. If my ‘stop loss zone’ is crossed, then I exit. I just place alerts at these levels – I don’t actually place a conditional order, because I like to evaluate once price gets there.

      Hope that helps –

      Danielle

      Reply

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