There’s been a lot of choppy price action in the markets recently…
Just look at the S&P 500 ETF Trust (NYSEARCA: SPY) 5-minute chart from last week … it looks like a rollercoaster!
SPY 5-day 5-minute chart — courtesy of StocksToTrade.com
During the first half of the week, the index was rangebound between $397 and $400.
After a huge rejection at $400, the SPY dumped down to a near-term bottom of $387.27.
Throughout this entire period, there was no clear trend or direction.
This is what I mean when I say the market is choppy.
Then, on Thursday and Friday, the SPY surged into a euphoric uptrend.
But when the market is this indecisive, it’s tough to have faith that any trendline will hold.
And after five days of whipsaw trading, the index is almost unchanged, back to near where it was trading at the beginning of last week.
With that in mind, today I’d like to explain how I keep my account safe during choppy market conditions.
Keep reading and I’ll show you…
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.
If you notice a day when no clear trends are forming and every setup seems to be failing … be extremely cautious.
Choppy trading days 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.
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.
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.
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
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 volatility of the contracts, but it also tempts traders to hold beyond their target.
This brings me to my next piece of advice…
Stick to Your Price Targets
On choppy market days, it’s critical that you stick to your price targets.
To be honest, I always advocate sticking to your price targets, regardless of the overall market conditions.
That said, there are times when I’ve allowed a position to fly beyond my initial target and been rewarded for it.
WARNING: With the current choppiness, now is not the time to let your trades run!
For now, you should be using the daily and weekly charts to identify your price targets.
Then, exit your trades as soon as they hit your target.
Be careful out there, Evolvers!
We’ll see if the uptrend from the end of last week can continue into this one…
But until we have confirmation of that, follow these steps to stay safe in the chop.