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.
“The natural formation of the country is the soldier’s best ally” – Sun Tzu
These words, authored nearly 2500 years ago in the great military treatise, The Art of War, are as accurate today as when they were first written.
One of the most potent keys to victory is understanding and choosing the terrain.
Many pivotal battles in history were won simply because of the conditions of the battlefield.
Consider the heroic stand of the Spartans and their allies at Thermopylae in 480 BC. Using a natural pinch-point that vastly outnumbered Greeks inflicted heavy casualties on the invading Persian army.
Or the famous battle of Agincourt in 1415 when an exhausted English army defeated the French in the Hundred Years War.
Facing 5 to 1 odds, the English decimated the heavily armored French cavalry, who became mired in deep mud as they advanced.
Different types of markets are much like the terrain of a battlefield.
There are times of smooth uptrends and downtrends. Flat, sideways markets with low liquidity. And the type of market we’re seeing right now with triple witching – volatile and choppy with massive gaps up and down.
As traders, we cannot change the market.
It’s an understatement to say the market doesn’t care about us – it doesn’t even know we exist. However, we can choose to engage the market on our terms by deciding whether or not we want to trade.
The history of market cycles tells us when certain conditions are more likely, and we can plan accordingly.
Obviously, if the market suddenly switches gears, you’ll need to use your management skills and follow your rules.
If the market goes crazy, you don’t have to. Keep your emotions in check, stay true to your plan, and look to minimize your risk. Don’t let an apparent bloodbath in your P/L cause you to exit a trade that may be profitable in just a few days.
Before you place any trades, always understand what kind of market you’re dealing with.
This is the first step of any trading plan. Charging into battle, overconfident like the French knights at Agincourt, can destroy your account.
Take some time each day to evaluate the terrain before you ever look at a single ticker.
Often, newer traders feel compelled to “do something” with their accounts every day. Don’t be one of them. Make the decision to engage the market on your terms.
I place every trade I send out with my own money, and I don’t like losing.
If you’re a long-term trend trader who prefers long calls and bull call debit spreads, then the chaos of highly volatile chop might not be the best time to enter new positions. Instead, manage your existing trades as per your rules and wait for the smoke to clear.
It’s difficult to trade trends when you don’t know what they will be.
On the other hand, day traders can be highly profitable during high volatility. This is because big intra-day swings are precisely what they need to make money. Unfortunately, sluggish, grinding trends (even bullish ones) provide fewer opportunities.
The take-home here is to decide whether or not you want to participate.
If you’re newer and don’t have the skills (or stomach) to deal with high volatility, then just sit back and wait.
No one is forcing you to push those buttons on your computer.
Use the trades you understand on tickers you like under the conditions proven to be most profitable for you.
Trade smart and stay safe.
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