Profitable ETF Trading Strategies: The Stepping Stone technique of trading volatile markets
The market never goes up in a straight line, it seems.
Lately, in fact, it has been surging wildly in one direction and then in another, creating whipsaws that have chased many traders away because of their inability to adapt.
It is still possible to trade for trends while managing your risk in such a way that you maintain a constant acceptable level of exposure at any given moment in the trade.
On those days or weeks when the market turns out to follow through in a particular direction, thus creating an observable trend, you will have been able to capture most of that move, while protecting yourself against the volatility of sudden sharp reversals.
It’s impossible to remove all risk from individual trades. If you could, there wouldn’t be a market. You would have replaced the market with a money machine. So, we can accept a measured amount of open risk on tradeable ideas and consider it as the cost of doing business.
If your business is laying sod, then you know you are going to get wet and muddy, because laying sod in the rain is a good idea. If your business is being a carpenter, then you know you are going to get the occasional splinter.
You expect it. You aren’t surprised by it. So we know, as traders, that we expect to take losses as part of routine business.
If psychologically you cannot accept the routine occurences of your chosen profession, then that’s a sign you should seek a different line of work.
Having said that, we can now look at trading like crossing a stream using a series of stepping stones.
You don’t start crossing the stream (ie the market) until you can see a reasonable and realistic way to get to the far side ( profit).
If there is a bridge, then it’s easy and everyone is using it (like dollar cost averaging or buy and hold using low-cost index funds). The problem with bridges is that can get congested, and they atrract both tolls and trolls.
To get across faster, and without the trolls and tolls (get more profit), you must find short cuts that are safe enough for you to use, but which other people cannot. That’s your edge.
If you are able to go across a stream using stepping stones, then you have a tradeable edge.
Think of each stepping stone as a separate trade within a longer term trend. By defining each leg of the journey as a favorable reward:risk ratio, we can plan to move from trade to trade when market conditions and entry conditions are favorable to us.
We can stay in each trade until it’s time to leave.
We never risk more than our next step, so our risk is constantly measured.
In this way, what looks like a daunting journey across an uncertain stream, is simply broken down into a set of measured steps, which allow us a way to retrace our steps if we find the next step is not as easy as it looked from the shore.
Keeping this metaphor in mind can help a trader navigate the uncertain path of the daily trading journey.