It seems like every tweet sent by President Trump brings the market further down today. That said, with the futures opening down lower, I’ve been getting bombarded by questions from clients and friends.

However, the one I’ve received the most of today has been:

How do I manage drawdowns in this volatile and news-driven market?

During a sell-off, you have to quickly run an audit of your portfolio and figure out where you are exposed in terms of risk.

For example, this is a difficult time to be a trend trader. Stocks are reacting to headlines and not technical’s (price levels, moving averages, support and resistance).

So of course, that means you’ll have to make some changes if you want to navigate through this volatile market successfully.

That said, I’d like to share with you the best piece of advice I’m sharing with clients. You might not like it, but it’s something you should hear.

 

Managing Drawdowns in a News-Driven and Volatile Market

 

When you’re trading volatile markets, there’s one thing you should practice (especially if you’re a beginner): patience.

What I’ve noticed is when stocks are down big, traders will try to get a better average price by buying stocks. However, what they don’t realize is the fact that they’re adding more risk on the table… they’re simply focused on making back their losses, and then some.

They want to buy every dip and every potential bullish candle signal… before there is actually confirmation. In other words, they’re jumping the gun and letting their emotions control their actions.

A lack of patience could ultimately lead to drawdowns – something a lot of traders in the Petra Picks chat asked about.

That said, let’s take a look at how to remain patient and manage drawdowns during volatile markets.

Stop Trading or Trade Smaller

When there’s volatility in the air, your best bet is to stop trading, or trader smaller and have less positions. Now, the market gapped down just over 1% this morning… and some traders were thinking, “This is a buying opportunity, I need to buy more”.

Was that the right mindset to have?

No.

Just because the market is dipping, it doesn’t mean you should go out and try to buy up all the stocks that are down. You see, with this news-driven market, a tweet from the President of the U.S. (POTUS) or comments from China could send the market lower.

I don’t know about you, but I don’t like to keep my money in stocks when there’s so much potential risk on the table.

If you do want to trade, make sure its your very best setups… and start with a small position, if it starts moving in your direction… look to add to it.

However, if your position is red… do not add a second position. Just leave your stops in place and don’t try to get a better dollar cost average.

For example, right now, I’m just focused on my setups, like the rounded bottom breakout (RBB) pattern. Not only that, I’m looking for stocks that have a history of being less volatile.

Now, if you have no idea where stocks could go… it’s okay to step away from trading and wait for better market conditions.

That said, if you trade less or simply stay in cash… you won’t have a hard time managing drawdowns.

Lower Your Expectations and Take Smaller Victories

Another problem traders have been having is failing to manage their expectations. For example, we all saw what the market did on Friday… many believed the market could do that again, and tried to buy on bullish candles.

Here’s a look at the SPDR S&P 500 ETF (SPY).

(If you bought and thought the market could bounce again… you would’ve been taking it on the chin).

For example, on Friday, I mentioned to Petra Picks clients about the gap play in SPY. Let’s say your execution was near perfection (buying right around $282.50), and you were looking for SPY to bounce off of the gap area back in April.

Well, SPY hit a high of $288.94. Now, traders were probably thinking the market could gap higher today after it had a major reversal Friday. However, if they caught that reversal… they should’ve been looking to take profits for a “small victory”, rather than holding on for a homerun trade.

Now, if you were one of those traders who bought the dip and thought the market could march to all-time highs… you were probably trying to manage your drawdowns today.

If you’re experiencing drawdowns, the key is to take smaller base hits. That means you shouldn’t be looking to nail 50% winners right now. For your trading confidence, it’s better to take small winners to get your account back in positive territory.

All you really have to do is focus on setups that have been working for you. Think about it this way, it’s easier to hit 10 5-10% winners than one 50% or 100% winner. If you manage your expectations from the start, it’ll be easier for you to manage drawdowns.

If you’re looking for more tips, make sure to check out my top trading tips video series. It’s free to download, all you need to do is register here.