Good morning, traders…
Ben here.
Market sentiment has shifted drastically since the last Fed meeting…
After a 1,000-point drop in the Dow followed by a weak-volume Christmas trading week, we’re seeing more selling pressure to start this week.
The S&P 500 was down as much as 1.6% on Monday before recovering slightly in the mid-morning.
Bottom Line: The market is still digesting the recent Fed commentary (re: less interest rate cuts moving forward), and no one knows exactly where it will settle.
When the tape is this indecisive, it’s tough to find conviction that any individual chart’s trendline will hold.
You might second-guess entries and exits you wouldn’t have a few weeks ago. And honestly, you’re right to do so. You need to be more careful right now.
It’s difficult to be extremely confident in this environment, especially going long.
That said, there are still plenty of good setups in this market — but they’ll require more discipline to execute.
So, if you’re wondering how to keep your account safe — and maximize your opportunities to profit — when the market is this swingy…
Let me show you four easy adjustments to make when navigating a choppy market…
Raise Your Trade Standards
When the market gets extra choppy, I become even more picky with my trades. I’m raising my standards, being more discerning, and making fewer trades overall.
You’ve probably noticed that I’ve been trading more conservatively over the past few weeks.
This is a conscious decision that comes from experience. I’m waiting for the setups that fit my strategy perfectly.
If you notice a day when no clear trends are forming and every setup seems to be failing — be cautious. Don’t try to get creative in this chop.
You have to know what you’re looking for in the options market, and then patiently wait for those setups to appear. Trade like a farmer waiting for the ideal harvest.
If a five-star, bread-and-butter setup appears … by all means, make the trade.
But don’t force setups you’re not 100% confident in. You don’t have to trade every day. There’s nothing wrong with sitting on the sidelines until you find the setups you’re looking for.
Go back to the basics. Only trade the patterns that consistently work for you.
Size Down Your Positions
Don’t overexpose yourself to risk in this chop. Size your trades carefully…
Smaller positions can give you more wiggle room to make mistakes, especially if you’re trading a small account.
It’s always easier (and more gratifying) to add to a winner than it is to trim a loser.
The most important thing is that you go on to trade another day. Protect your account at all costs and NEVER risk more than you’re willing to lose.
This is even more critical if you’re trading a small account…
I can’t tell you how many traders I’ve seen blow their entire careers on a few poorly-sized trades.
Don’t be like these failed prospects. In this choppy market, be very deliberate with your position sizing.
Pick the Right Strike Price (and Expiration Date)
Let’s say you’re looking at a setup on Stock XYZ, currently trading for $10…
If you think XYZ could run to $11 in the near term, you should buy $11 calls.
Don’t buy strike prices that are further out of the money than your price target. This may sound obvious, but I see students make this mistake all the time…
A less-experienced options trader might buy, say, a $12 call on Stock XYZ, going for a home run.
But this is a mistake. Not only does this increase the implied volatility (IV) of the contracts, but it also tempts traders to hold beyond their target.
Furthermore, the same type of problem can occur when choosing expiration dates…
When the market is choppy, don’t hold swing trades for more than a few days. Who knows what’s gonna happen next week?
You want to give yourself some margin of error while still sticking to relatively short-term contracts.
One week is a good amount of time to reap solid rewards if you’re immediately correct while also giving you wiggle room to exit without disastrous losses (if the trade goes south).
This brings me to my next piece of advice…
Be Flexible
When the market is a “chop-fest,” so to speak, you need to embrace your flexibility as an options trader…
Traditional stock traders have two choices — long and short. But as an options trader, you aren’t limited to these choices. Your trade possibilities are essentially endless.
You can bet on general volatility or the spread between two contracts, buy puts to hedge long positions, and even sell covered calls or puts on stocks you hold.
That said, many newbie options traders don’t see these possibilities. They’re trading with blinders on, only looking at calls and puts.
There’s nothing wrong with sticking to calls and puts, but you also shouldn’t completely ignore the possibilities the options market provides.
Consider alternate options trading strategies. Paper trade them and see how they react.
Be flexible and open to anything this price action asks for and adjust your strategy accordingly.
Happy trading,
Ben Sturgill
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*Past performance does not indicate future results
