PHO TOGRAPH: DAN SAELINGER | ILLUSTRATION: RANDALL WATSON
• DO THE OCTOBER JI TTERS keep you
up at night worrying that the markets
might crash at the open? Maybe some
breaking news came out that could
impact the markets. You have open
positions and are cursing yourself for
not closing them earlier. Anything
could happen overnight—trade deals
gone awry, global turmoil, or just plain
fear—that could make traders anxious.
And given that some of the most nota-
ble market crashes have taken place in
October, it’s not unusual to find traders
crouched under a table, rocking back
and forth, waiting it out for the month.
But volatility (vol) is part of the
game, and as a trader, you have to know
how to deal with it. And it can happen
at any time. To confront vol, you need
a plan, the discipline to exercise that
plan, and a superhero attitude to take
on anything that comes your way.
Our cover feature, “Volmageddon:
How to Trade a Crash” on page 16,
talks about strategies you could use
as markets are going down. Whether
you hold stocks for the long term, are
comfortable trading in a volatile environment, or are a baller trader willing
to go large, there’s likely to be a strategy you could use and incorporate into
your trading plan.
But how do you come up with a
trading plan so your strategies aren’t
obsolete? One way to go about it is to
create a decision tree. It’s like putting
game theory into action. In “It’s Your
Loss. What Are You Going to Do?” on
page 22, we walk you through the process of creating the different branches
of a decision tree. Traders often have
strong reasons to enter a trade, but no
matter how strong the reasons, things
Bring it on!
can go against you, and you need to
know when to make that exit. Using
a decision tree can make the process
more logical and less emotional.
Even if your portfolio is made up of
stocks for the long haul, there may be
times when you have to make adjustments. Every position—long or short
term—needs to be protected. There’s
no such thing as “set it and forget it”
when it comes to trading. In “How to
Hedge Your Basket” on page 30, you’ll
learn about ways to size up a portfolio
hedge using index options and some
different strategies to consider for
various market scenarios.
So, in case you hadn’t noticed, the
theme for this issue is a nod to the
possibility that things are changing.
Of course, we have no way of knowing
which way this market will go next,
but when vol increases over prolonged periods of time, as we’ve seen
in 2019, it can’t hurt to learn a cautious
strategy or two.
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