Adjusting Your Trading Strategy During Volatile Markets

The 2022 bear market has undoubtedly been one of the more difficult market environments to navigate over the last several decades. The volatility has frustrated both bulls and bears, as the whipsaw action has made it problematic to profit from either the long or short side.
But traders who are able to adapt their strategies to the volatility can still reap substantial profits. When most stocks are falling, it’s common sense that profits will be smaller than normal and losses will be larger and more frequent. There are a few ways we can lessen any potential downside impact and adjust our strategy to the more volatile environment, including:

-Sizing positions less than normal, resulting in less capital commitment. Less capital at work means less overall risk. While holding cash in a highly inflationary environment isn’t ideal, it’s better than holding stocks that are falling 20-30% in value or more.
-Tightening up our stop loss/selling target. Using a rule-based system that eliminates emotional decision making can help us avoid large drawdowns. We can also adjust the parameters of that system according to the type of market dynamic. In more volatile markets, perhaps we adjust a normal 10% stop loss to 7-8%.
-Taking profits more quickly than normal. Due to the inherent volatility during bear markets, rallies tend to be shorter in length, and as such we must be willing to take profits sooner than we normally would.