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4 Immediate Changes to Make to Your Trading in Higher Market Volatility

Posted by TopstepTrader on February 06, 2018

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Futures trading firms have to carry a disclaimer: "An investor could potentially lose all or more than their investment."

While that warning seems overly cautious, on days when the Nasdaq ($NQH8) moves 20 handles at a time, it becomes clear why. Price can blow past your stops. If you trade like it's just any other day, you can lose more than you intend. 

Here are four changes to make to your trading to ensure that doesn't happen. 

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1. Immediately Reduce Your Trading Size

Can you make a lot by throwing up 10 lots on trading days like today? Absolutely. But does that show skill or are you gambling? On days when markets are volatile, you have the ability to make more with less. Equity futures yesterday were having $5,000 swings — on a ONE LOT.

So, instead of using max leverage, trade smaller. Get accustomed to the markets as they open this morning. And then, when you have the opportunity and are playing with the house's money, slowly think about upping the number of contracts you trade. 

2. Put in "Wish" Trades

You don't have to trade at the market. Instead, think about those levels that would be great trades if you can get them. Trading legend Yra Harris talked about this strategy in an episode of Limit Up. What he will do in volatile times (so often around economic releases) is put in an order that he would like to execute that is way above or below the market. It's a price that may seem absured, but one that he has a lot of confidence in if it gets hit. 

This morning, don't think it's absurd to put an order 20 handles (or more) below the S&P 500. Figure out those locations — maybe the 200-day moving average — where equities will see support, and then try to buy there. If the market hits your order, you just got a gift. 

3. Widen Your Stops

If you have a strategy with tight stops (like less than five $ES points), you may want to be more selective and widen them out a bit. Otherwise, you may find yourself getting chopped up all day. 

The thing that traders like about markets is predictability. You have to know that the market signal you are waiting for is typically indicative of a price moving higher (or lower). But in days like yesterday and today, those prices can vary a lot more. So give yourself more room to be right. 

However, just because your stops are farther away from the market doesn't mean you have to take more of a loss on them. Trade smaller. Be more disciplined. Give your trades extra room to work out, but don't take more risk to do it. 

4. Leave Room for Slippage

The market jumped yesterday. Make sure that your stops are market orders — not limit orders. If they are a limit order, your order will not execute if the price jumps right through that stop. And you open yourself up for more risk. 

If you place stop market orders, your stop may get jumped, but the price will execute at the next best price, getting you out and saving you peace of mind. 

And as it relates to the Trading Combine rules, make sure that you leave room within your Daily Loss Limit and Weekly Loss Limit for slippage. Don't try to get out of the market at a $999 loss for the day. The market won't cooperate, and you'll end up breaking a rule. Give yourself at least a few points of slippage. Hopefully you don't need it, but you'll be thankful you built in the room if you do. 

If you have any questions or feedback, please leave it in the comments. 

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