How To Be The Most Boring Trader In The World
be careful out there-buy it sell it dont fall in love
My friend Jamie Saettle in a Twitter message this week
The currency markets went crazy this week but I managed to keep cool. The last time I saw USD/JPY fall by two big figures in a matter of seconds was during the “flash crash” in May of last year. At that time I was buying the pair all the way to the bitter end using that well known trading methodology of “hey its gotta rebound sometime!” Needless to say that adventure ended badly. The pair did indeed rebound -- right after I was margined out.
The “flash crash”, painful as it was, taught me some very valuable lessons.
1. When volatility spikes don’t jump into the market right away. Like a soldier on the front line you’ll be the first to slaughter by market forces if rush in too quickly. On Wednesday when all hell broke loose I waited for the price action to settle down for at least 15 minutes before entering any trades.
2. Price can and do go much further than you think is possible. Picking tops and bottoms in times of high volatility is like chasing tornadoes. The thrill is amazing, but there is a strong chance you’ll be flying with the cows. If you are going to try to pick inflection points, then use hard stops without remorse. On Wednesday, USD/JPY dropped below 78.00 once it tripped the stops at 80.00, but if you tried to bottom fish you would have most likely been blown out nearly 200 points lower as it continued to fall to 76.25 before finally rebounding.
3. Trade small not big. This is perhaps the single most important lesson I took away from the “flash crash”. In times of high volatility the instinct is to go for the jugular. The impulse it to trade big in order to capitalize on the situation when in fact the rule should be to trade small in order to minimize risk. The single greatest reason for my improved performance this month has been my inverse correlation to volatility. The greater the vol, the smaller I trade. During the downward spike in USD/JPY I was trading as small as 1/5th my regular size which was already reduced to only a 2:1 lever factor.
As you can see in this week’s BK video trading tight allowed me to take advantage of the highly volatile markets without endangering my account. This week I officially became the Most Boring Trader in the World and I was very proud of my accomplishment.