Six Simple Rules to Follow When the Market Gets Ugly

By Justin Cook | October 3, 2019

Since the dawn of the exchange, market participants have weathered volatility with caution in the face of uncertainty. There have been times when the markets soared and gains were easy to be had; and then there were times when the markets bottomed out and only a select few were able to realize profits. What’s the key to being one of those select few to survive a market correction or depression? The first step would be to get educated, because understanding how the markets work enables traders and investors to implement strategies that could protect their capital and, yes, even realize potential profits when the market gets ugly. Here are six expert tips to help you protect your capital and ride out the storm of a volatile market

Rules for ugly market

Rules for Protecting Investments in Volatile Markets

Stops are a Trader’s Friend

Whether the market is moving up, down or sideways, stops are a terrific tool to help manage risk, as well as expectations. Regardless of the trading strategy – long or short—incorporating stop orders into a trading plan helps keep losses in check and gains locked in. At the same time, stops force traders to divest from the trade emotionally, which alleviates lingering panic and second-guessing. Traders need to wait for their setup and be sure to set stops on both the highs and lows while remembering the goal is to be in this for the long run and getting stopped out is a part of what makes the plan work.

Patience Often Pays Off

Obviously, it’s possible to make money when the markets are going up, but did you know it’s also possible to make money when the markets are going down? Learning strategies for shorting the market and being aware of viable cash alternative investments that are available could help control risk in a down market while allowing for some gains as well. Perhaps just as important is knowing when to stay out of the markets altogether. Be patient, it’s ok to sit on the sidelines while waiting for low risk, high reward opportunities.

Diversify Investments

Being knowledgeable about and diversifying into different assets is powerful, no matter how the market is performing. Traders and investors should not put all their eggs in one basket as that adds risk. The key is to spread investments around to different asset classes and markets which are not correlated. For example, bonds often move in the opposite direction of stocks. So, when stocks are down, the bond market might be somewhere you’d look for profitable opportunities. Rotating investments to the appropriate sectors according to the business cycle is also a great way to diversify. When one market’s ugly, look at another.

Develop a Trading or Investing Plan and Stick to It

When market volatility strikes, traders may be tempted to bend the rules of their trade plan in order to mitigate losses or be made whole again. Don’t do it. A well-rounded trading plan helps traders define their purpose, goals and strategy as a trader, so it makes sense that it also should include when and when not to trade. Remember that patience we talked about? Also, since trading plans are specific to to each individual, traders should avoid acting on advice about trades from other individuals. It can’t be stressed enough how important it is to always stick to the trading plan.

Look at the Big Picture

Make sure to reference the correct chart whenever assessing market trends and volatility. Using too small of a chart—a chart on too short of a time frame—may give the false impression that the market is in a specific trend, when the primary trend may be in the complete opposite direction. Generally speaking, the longer time frames provide the most accuracy in confirming primary trend direction, which is why it’s so vital to consistently review price charts on larger time frames. These larger time frames will allow visibility into whether the market is in a specific trend, or if it is really just consolidating.

Risk Management

Most people understand the mathematical part of risk—that one’s easy enough. True risk management, however, requires a specific type of mindset; one that allows a person to accept that losing trades is just the cost of being in the market. Traders who trust in the step-by-step process are usually able to think strategically and exercise sound risk management. Do this properly, and it is possible to lose some trades and still be profitable. Having the proper mindset will helps to achieve a higher probability of reaching goals, so long as discipline is maintained. And trading is all about discipline: the discipline to write a plan, the discipline to stick to that plan, and the discipline to always follow the rules of the plan.

About the Author
Justin Cook

As Author and Content Editor at, Justin composes scripts and articles for the Content Development Department.

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