It’s no secret that the major indexes have been choppy recently…
The S&P 500 ETF Trust (NYSEARCA: SPY) has been dancing up, down, and around the $450 level for the past 30 days.
The second half of July looked promising as the SPY entered a mid-term uptrend. But all of those gains have been erased in August.
Now, after a month of whipsaw trading, the index is back to near where it was trading in mid-July.
This is what I mean when I say the market is choppy.
And when the overall market is this indecisive, it’s tough to have faith that any individual chart’s trendline will hold.
So, if you’re wondering…
How can you keep your account safe — and maximize your opportunities to profit — when the market is as choppy as it is right now?!
Keep reading and I’ll show you four steps to take during unpredictable market conditions…
Raise Your Trade Standards
I’m a pretty conservative trader in general.
But when the market gets extra choppy, I become even more discerning with the setups I trade.
In other words, I raise the standards for the plays I’m willing to make.
You’ve probably noticed that I’ve only made a handful of trades over the past few weeks.
This is a conscious decision that comes from experience. I’m waiting for the setups that fit my strategy perfectly.
If you notice a day when no clear trends are forming and every setup seems to be failing — be cautious.
Choppy trading periods are not the time to get creative…
If a five-star, bread-and-butter setup appears … by all means, make the trade!
But don’t force setups you’re not 100% confident in when the market is whipsawing all over the place.
Go back to the basics and only trade the patterns that consistently work for you.
Size Down Your Positions
I’ve been talking a lot about risk recently, for good reasons…
Don’t overexpose yourself to risk in this chop. Size your trades carefully…
Smaller positions can give you more wiggle room to make mistakes, especially if you’re trading a small account.
REMEMBER: It’s always easier (and more gratifying) to add to a winning trade than it is to trim (or cut) a loser!
The most important thing is that you go on to trade another day.
Protect your account at all costs and NEVER risk more than you’re willing to lose.
This is even more critical if you’re trading a small account…
I can’t tell you how many traders I’ve seen blow their entire careers on a few poorly-sized trades.
Don’t be like these failed prospects…
In a choppy market, it’s important to be very deliberate with your position sizing.
Pick the Right Strike Price (and Expiration Date)
Let’s say you’re looking at a setup on Stock XYZ, currently trading for $10.
If you think XYZ could run to $11 in the near term, you should buy $11 calls.
Don’t buy strike prices that are further out of the money than your price target.
This may sound obvious, but I see students make this mistake all the time…
A less-experienced options trader might buy, say, a $12 call on Stock XYZ.
Not only does this increase the implied volatility (IV) of the contracts, but it also tempts traders to hold beyond their target.
Additionally, the same type of problem can occur when traders are choosing their expiration dates…
When the market is choppy, I don’t recommend swing trading. Who knows what’s gonna happen next week?
That said, I also wouldn’t suggest buying contracts expiring a day from now.
You want to give yourself some margin of error while still sticking to relatively short-term contracts.
For example, on my most recent Nvidia Corporation (NASDAQ: NVDA) trade, I bought contracts expiring on August 11, but I bought them on August 4.
One week is a good amount of time to reap solid rewards if you’re immediately correct while also giving you wiggle room to exit without disastrous losses (if the trade goes south).
This brings me to my next piece of advice…
When the market is a chopfest, so to speak, you need to embrace your flexibility as a trader…
In most market conditions, you want to decide on a price target and stick to it.
But when the market is unpredictable, you’ll need to adapt to the shifting market conditions, which includes adjusting your price targets as the price action calls for it.
Like, for example, my recent killer (albeit lucky) trade on Carvana Inc. (NYSE: CVNA).
When I bought the calls, the stock was trading for $39. I had an initial price target of $45.
That said, no one is perfect. Even with all of my experience, I haven’t adjusted perfectly to every recent play…
During the NVDA puts trade I mentioned earlier, I played it too safe. Even though I felt the stock could trade down to the low-$400s, I sold early and missed out on a small fortune.
WARNING: Executing these sorts of trades comes down to understanding the delicate balance between holding runners and booking profits quickly.
There’s no easy answer here. Some trades require patience to hold, while others dictate that you must sell immediately.
But in this market, to maximize your profit potential, be flexible and open to anything the price action asks for.
Are You Ready To Take The Next Step?
I’ve said it before and I’ll say it again — I wouldn’t be a multi-millionaire if I hadn’t joined Tim Sykes’ Trading Challenge so many years ago.
And now, I want you to have all of the advantages I did in my early days of trading.
So, if you’re passionate and dedicated, ready to take on anything the market throws at you, then I’ve got something for you…
My mentor, Tim Sykes, has helped traders learn to succeed for years. More than 30 of them (including me) are now millionaires.
Are you ready to take your trading game to the next level? Do you have what it takes to face the Trading Challenge?
Let’s find out…
I can’t wait to see you there!