Coping with volatility – the value of experience

This post continues from ‘Is volatility your friend?‘ The emphasis here is on copying with volatility. ‘Coping’ is a psychological thing. New traders will have emotions and it is no good denying this or avoiding it.

The screencast below brings out what tends to happen with new traders when price moves in the ‘opposite’ direction (full screen view is best).

There is no magic formula or advice on how to cope with volatility. This is where experience comes in i.e. time in the markets. In developing ‘nerves of steel‘ a new trader must do the time, feel the pain, and in due course find his own ways of emotional desensitisation. The latter is not about becoming ‘numb’ or ‘ignorant’ to risk. On the contrary, it is about knowing that one has been in difficult situations before.

I return to things such as learning to ride a bicycle or driving a car. Initially one does not fully understand most of all the features and what can happen in commanding the vehicle. Events on busy road may cause lots of ‘nerves’. With time, a cyclist or learner driver understands what’s happening and how to manage situations. What was at first uncertain and manageable becomes second nature. This is the nature of experience. No coach or trainer can ‘give’ you ‘your’ experience in advance. They can give you their experience, but that’s still not your experience. To get experience, you simply have to do the stuff.

A situation with Bitcoin (BTCUSD) came up recently. The wedge pattern on the 1D chart emerged when shorting. So what do I do? First thing is, I’ve seen this umpteen times before. I know that the probability is higher for a reversal as the wedge has hit on the 100EMA. Well instead of holding on to short positions and aiming for a target at 8000-ish mark, I exit for a small gain at the base of the lower edge of the wedge. Then reverse and go long for small profits. Why small? The trend has changed and I know that a wedge does not rule the markets i.e. price could go south any time it wants. The probability of loss is set against the probability of price moving north with any great energy. There is no way to work out when price may break out of the wedge. One would need a crystal ball, and I’m definitely handicapped in that department.

As a new trader finds his feet and develops confidence based on evidence in his methods, emotions fall away quite a lot. So when charts go crazy (on any time frame), the experienced trader will in his self-talk go, “No problem. I’ve seen this hundreds of times before. I have an expectation of what can happen. I can see into the patterns and get out of this. No need for panic.”