When day trading or swing trading volatile markets, there are several things to keep in mind. I bring these up because many newer traders that have only been trading for a few years may have never experienced very volatile markets, like what we are seeing right in the stocks and forex markets.

Things I Remember, and Do, When Trading Volatile Markets

These are general guidelines, and are not meant to replace a valid trading strategy. I utilize my trading strategies in volatile markets, but I keep these things in mind in order to maximize the efficiency of my strategies during volatile conditions.

• Don’t trade the long side of the stock market until we get bullish conditions

I am mostly focused on forex trading until we see more bullish action in the stock market. Day trading stocks is great in this environment, but swing trading stocks is not (at least on the long side). Because of gaps in this craziness, I would rather not even be short.

For details on how to determine when bullish conditions are returning to stocks, see S&P Outlook for Swing Traders.

For some additional techniques for spotting market stock market bottoms, check out my Facebook post in my free Swing Trading Group.

All types of forex trading are fine.

• Biases kill me

It may seem strange not to have a bias, but in volatile markets, I totally let price lead my decisions. When I “think” I know what will happen, that is usually when I get hammered.

Because there is so much movement in volatile markets, I don’t assume to know which direction the price will go in the short-term. Even if I think something is going down over the longer-term, if I get a signal to go long I will usually take it, because in volatile conditions you can still make a lot of money on a counter-trend move that moves 200 pips in your favor or $2 or $3 in your favor in a stock.

• Price moves are erratic and sharp—Use Trailing Stop Losses

When you are used to making a 50 pip swing trade that takes a few days or a week to hit your target, it is very hard to switch modes and reasonably expect to make 300 pips in an afternoon. As mentioned above, our biases, which in this case are what we are used to, will often underestimate how far the price may run. Or, if we get caught up in the news headlines, we may expect the price to run even more than it already has. In either case, in volatile conditions (really any condition) it is hard to predict how far the price is going to move.

Instead of spending a bunch of time theorizing, I assume that I can’t predict how far the price will run, so I just use a trailing stop loss. This produces small losses and profits when the price doesn’t move much, but produces huge profits when the price runs aggressively.

Renko charts actually work well as an exit method (wait for the reversal). Another indicator I like is ATR Stops, for stocks. I find it less useful for forex.

A moving average may also work, potentially an 8 or 16 EMA. Not my favorite, but it can work well in sharp moving markets.

• Exit on “extreme” spikes/drops

If you see a trade that is positive a crazy amount, and you are scratching head thinking “WOW”, I usually just take the profit. Close it out, and don’t think about it. If it is way more than you ever expected to make, chances are other people are thinking that too and the move is close to over.

• Volatile doesn’t mean volatile every day—still need to pick our spots

If you make 20% on your account one day (or whatever %), or hit a huge profit level for your account one day, it is very easy to assume those huge moves and profits can be replicated the next day. Probably not. Trading a good system will occasionally produce monster days…but not every day. Even during volatile times, not every day produces big profit trades. At the start of this week, we had some massive forex moves. If you were on the right and using a trailing stop loss, you made a windfall. In the days since, there is still volatility, but the price action is choppier. Profits are likely smaller.

Stick to your system. Don’t let a big day lure you into thinking it will happen every day. Control your biases, and stick to your strategies. Still be selective in your trades, just as you always should be.

• Prices still trend and range

As discussed above, don’t assume that just because it is volatile the price will only move in one direction. Trade the price action as it comes, but be open to all scenarios, not just one.

• Trust price action signals, not biases, or mind

Review your strategy before you begin trading. Tell yourself you will stick to your system, and review what your entry and exit criteria are. What you think, what analysts think, or what the news is saying doesn’t matter. Trust your strategy and your trade signals. Stick to them, whether they go against your biases or not.

• USE SMALLER TIME FRAMES FOR ENTRY AND STOP LOSSES, BIGGER TIME FRAMES FOR TARGET AND TRAILING STOP LOSSES

Many of you know that I like to use consolidation breakouts for my entries. In all conditions, but especially volatile conditions, I will keep dropping down time frames to find smaller consolidations within larger ones. Those smaller conditions should be closest to the big support or resistance level (trendlines etc) that I am interested in. For example, I may see the price consolidating on a rising trendline on an hour chart. I could trade a breakout of that, but I could also drop down to a 5-minute chart and find a consolidation right along the rising trendline (near the bottom of the hourly consolidation). This will provide a way bigger reward to risk. Use a trailing stop on the hourly chart, but set your stop loss and entry based on the 15-minute or 5-minute chart.

In the example below, we could trade an hourly consolidation with 50 pips of risk, or a 5-minute consolidation with 15 pips of risk.

In volatile conditions, I would rather take more small losses and capture huge profits when the big moves occur. The nice thing is that in volatile conditions we know that big move is likely going to occur. During quiet conditions, we don’t.

Take care out there…and make a killing!