Reduce Anxiety by Decreasing Risk

Posted on Friday, August 16, 2019 at 1:33 PM

Tariffs, China, Hong Kong, Russia, Iran, inflation, central banks, recession, negative yields, inverted yield curve: All these terms have dominated headlines, and they incite anxiety for investors. Even agile short-term traders struggle in an environment where unvetted stories and half truths move markets. Rumors and threats in social media have had more impact on prices than the facts, such as economic data and earnings.

One thing we can do to navigate such volatile times and reduce anxiety is to adjust risk and profit projection to more realistic numbers. When projecting profit or defining risk, I often use a percentage of ATR (average true range) to set those levels. The benchmark time frames I prefer are 20 days, 9 weeks, 7 months and 5 quarters. But when volatility rises so sharply, I cut those numbers in half to get a more accurate reading of potential market movement. For example, if we use the standard 20-day ATR for S&P to set profit targets or risk, there is a good chance we will be stopped out or are taking profits too early. The S&P average day range has doubled in the past 2 weeks. Subsequently, my risk has doubled and so has profit potential.

Adapting to current market conditions is something all great traders do. Identifying when a market has reached overbought/oversold status is instrumental when looking to take profits or countertrade a move that has reached exhaustion. A market is thought to have moved too far, too fast when the day range is twice the norm. Another good indicator for defining overbought/oversold is when a range spans the length of an average week in just 48 hours.

To reduce anxiety, decrease risk and increase profit potential. To do that, stay current with volatility to use as a guide to set price targets.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

« Previous PostConsider a Collar as an Investor Next Post »What Has a Better Chance of Happening?

Please add your comments


Options Trading Blog

Archives

Tags