Trading ranks high as a very stressful job.
Keeping track of the order book, profits and losses, meetings with clients and management, and of course – trading.
Ask anyone on the trading desk, keeping one’s cool in the heat of all this commotion can be extremely taxing and requires a special sense of cool and calm. Trading is not for everyone – neither the pure act nor the environment.
So, how does one maintain their professionalism, excellence and poise?
Nicholas Crawley at DailyFX told Traders Magazine that a trader’s daily routine should always be to check his/her positions and where their stops and targets are, whether these positions are still valid and most importantly whether the trader is still comfortable with these set-ups. Unless one can tick all three boxes, one will need to make changes.
In normal times, these changes would be minimal. Crawley sat down with Editor John D’Antona Jr. and said the market is not in normal times and the current market backdrop of extreme levels of volatility require traders to keep an even closer eye on all outstanding trades and potential set-ups.
First, make sure you aware of and comfortable with all your open positions.
“If you are not comfortable with any of your open positions, for whatever reason, they need to be closed,” Crawley said. “There will be a reason why you are uncomfortable and this will affect your performance and the way you handle that position. You should always know what orders you have left in the market and why they are there. In volatile times even orders placed a long way from the current market price can be filled quickly.”
Second, traders must clear targets and stops on all positions on entry
Crawley explained traders must always have a clearly defined entry and exit price on all trades, even if they are very short-term traders (Scalpers). An exit price is where you believe the market will go to if your analysis is correct, a stop price is where you believe that your analysis is no longer correct. Stop losses must be put on when you enter a trade and not be where you ’think’ that you will exit a position.
Thirdly, ensure current positions meet one’s original parameters.
“Market conditions change constantly, especially in times of great economic uncertainty, and traders should revaluate their current positions and future trade set-ups on a regular basis. A long position in oil or gold for example based on technical analysis will become null and void if the fundamental background changes dramatically,”
And what about risk tolerance and market exposure?
“Trading by its very nature is challenging and can easily lead to high levels of anxiety and stress. Traders should be honest with themselves about this and should not place themselves in a situation where a position takes control of their emotions as this may lead to ill-thought out decisions being made,” he said. “If one asset class is too volatile for you to trade comfortably, then look for other lower-risk asset classes which you may feel suit your trading personality. Take note of your risks.”
Monitor one’s levels of correlation and volatility.
“This is the degree with which two different classes move in relation to each other and is defined in a range of +1 (high) to -1 (low). If you hold a variety of assets with high correlations then you are essentially increasing your leverage and leaving yourself at greater risk if the market turns against you.”
Volatility is a measure of risk for any given asset class based off price moves over a given time period. If an asset has high volatility then it will likely move more than a low volatility asset when markets become volatile. For example, the CBOE volatility index (VIX) is based on the constituents of the S&P 500 over the next 30 days. A high VIX reading suggests larger price moves in the underlying constituents, while a low reading suggest smaller price moves ahead.
Lastly, a trader must be able to clearly explain and justify his/her positions.
“When you open a new position, or put in a market order, do you have a clearly defined exit plan and can you clearly explain that strategy to another person,” Crawley said. “It is easy to get caught up in the market and your reasoning can become clouded. Take a step back, make sure that this is the right trade at the right time and that you are clear what your expectations are.”