Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Like most things, trading can be frustrating, and we can never completely eliminate risk. What’s more, the trading landscape changes just like the seasons.
The market continues to be overextended.
We’re also entering two of the most historically tricky trading months, August and September.
Not necessarily unprofitable, just challenging.
I stay in the markets year-round because trading is my profession. I have a weekly income goal and use every strategy at my disposal to hit or exceed that number.
However, certain times of the year just make the job more challenging.
Earnings, institutional portfolio rebalancing, and the “toppy” market mean one thing – minimize your risk.
By all accounts, the market is due for a significant pullback.
Sometime…Maybe sooner, maybe later.
However, price action in the market often does just what it isn’t supposed to do. I don’t have a crystal ball to see into the future. I just focus on the charts and act according to my plans.
So what is the best approach for trading tough months?
One approach is to just sit back and stay in cash. Don’t do any trading at all.
Exiting the market is the only way to completely eliminate all risk, precisely what some traders do.
There’s nothing wrong with this approach; however, it’s not one that I personally subscribe to. When you aren’t trading, you can’t lose money, but you also can’t make profits.
Even amid market chop, pullbacks, and sell-offs, there are golden opportunities.
Let’s suppose you follow my plan and keep trading.
What steps can you take to keep your capital safe while not missing out on your weekly goals?
The first is trading allocation.
Suppose you’re trading with a 100K account, and your typical allocation is to trade with 75K and keep 25K as a cash reserve.
It’s prudent to raise your cash balance in anticipation of the worst.
Rather than trading with 2/3 of your account, go in with one-third or at most one-half. You’ll reduce your exposure and reduce your risk.
A second method is position sizing.
I usually advocate keeping your positions to no more than 1-3% of your trading capital. However, this rule isn’t set in stone.
During the historically bullish season between November and January, or on well-planned, multi-position trades on a major ETF (like XLI) or robust stock (such as GOOGL), I may allocate 5% or more.
Likewise, in difficult months I’ll likely keep a much lower position size.
I may only use 0.5-1% per position.
Finally, there are the set-ups.
As you accumulate trading experience, you’ll learn the entry criteria with the highest probability for you. Notice that I said “for you” and not for your friend Bill…each trader is unique.
Keeping records of your trades will let you know which set-ups are most likely to be profitable.
In fast trending periods such as the historical Christmas Rally, you can afford to be a bit more lenient with your trades. Extremely bullish markets can sometimes reward even bad behavior.
In the leaner times, you must be extremely picky on your set-ups.
Only go in on the absolute best, and stay away from risky, speculative positions.
So the takeaway is to adjust your risk tolerance to the market condition.
Run when you’re on safe ground and tip-toe cautiously when you come to a minefield.
I pay close attention not just to how the market is moving based on current data and historical precedent. Though you can’t assume the past will predict the future, it does give clues on what it’s likely to do.
My subscribers get ample warning on market conditions each upcoming week and the safest general strategy.
In times like these, only the very best trade alerts go out.
If you aren’t a part of the Alpha Hunters program, I encourage you to check it out. But if you decide to go it alone, just be sure to rake in the profits during the good times and trim back your portfolio when things get dicey.
Trade safe, trade small, trade smart.