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Ten Protocols For Surviving Extreme Volatility
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Ten Protocols For Surviving Extreme Volatility

by The MoleMay 19, 2017

The curse of the traveling mole appears to have struck again. Although it’s become an old joke among senior participants on this board I cannot help but wonder if the universe seems to have endowed me with a special ability of scheduling my trips right ahead of market corrections. Be it a random occurrence (likely) or a profitable super power (not likely), in order to maintain both our sanity and our trading accounts I thought it a good idea to re-post a few protocols aimed at maximizing our chances of surviving in a highly volatile trading environment:

Suffice it to say that this list is obviously incomplete and should always be considered in the context of your own trading activities. If you are a short term momentum trader then you actually may choose to ignore or even invert some of these rules. As with everything in life your mileage will vary. Without further ado:

  1. Pick your entries carefully/meticulously. For trend traders the highest probability for success appears to be around major inflection points where potentially large explosive moves are possible. For mean reversion traders this means waiting for extreme signals followed by price confirmation. Everyone has a different lens and we trade different types of systems. What we all share is that our entries need to occur when the odds are clearly on our side. Do not make excuses and be patient. Let the tape come to you.
  2. Stick with your initial stop loss – no exceptions. I think that’s a very basic one but it bodes repeating.
  3. Keep your stops wider than usual. I recommend > 1.2 x daily ATR(14). So if the daily ATR is 20 ticks then your stop should be at minimum 24 ticks away. Obviously this rule is meaningless if you’re a ST swing trader but at minimum multiply your previous system stop loss by 1.5 or more.
  4. Keep your position sizes smaller than usual. I recommend 0.5% of your assets per campaign or less. The advantage of volatile markets is that they can move fast and far, thus even a smaller position should pay off well. You should already understand how R works and that larger stops affect your position sizing [1][2]. For example if you see a crude entry and you have insufficient assets for a single contract then you may want to trade an ETF instead.
  5. Do not trail too early. This mostly affects trend traders or people who trade break out patterns. I could draft an entire article about this but in a nutshell you should under no circumstances start trailing until your campaign touches 2R+ MFE. If you want to know why then just look at the campaigns above and you’ll understand. The odds for a final whipsaw before take off are high and I am seeing stop runs ahead of trending moves all the time now. You should also not be too quick about moving your ISL to break-even. Personally I am skipping my b/e rule at this point and will keep my ISL until 2R MFE. If you insist on locking in your entry wait at minimum until 1R MFE.
  6. Take partial profits after 3R. This is not something I usually enjoy doing this early. But in the current environment and until we see a reduction in intra-day volatility I believe that taking partial profits after 3R MFE is necessary. How much you take off the table is up to you but I personally cash out 50% of my positions now.
  7. Take every single entry. The other side of the coin. There is no problem in being extra picky with your entries. But write down your entry rules and stick to them. Taking one campaign which results in a loss should not keep you from entering again tomorrow if the same conditions represent themselves. Don’t fall for recency bias.
  8. Keep a trading log and monitor your activity on a daily basis. Part of that is to also maintain an equity curve which clearly delineates where your pain threshold is and when you should stop trading.
  9. If you stop trading keep trading on paper. There is only one way to know whether your system is in a drawdown or if it is permanently broken. You need to keep trading it, even if it is on paper. So keep taking entries in your demo account and record the P&L. As soon as the system appears to pick up again continue trading it, even if it’s with reduced position sizing. It’s quite natural for systems to go through earning and losing periods.
  10. Don’t have an opinion and don’t listen to anyone who offers you one. I guarantee you that nobody knows more about the future than you do. We are all driving blind here. Besides, successful trading is not about predicting the future, it is about dealing what’s directly in front of you in the most productive manner. Meditate on that.

About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • ridingwaves

    why not the 10 commandments, moses-mole…..close enough
    bulls now ready to go higher….

  • StockTalker

    No one knows how long this trend will continue but remember that pigs eventually get slaughtered.

  • ridingwaves

    trying 1/2 R UVXY at 13.28, spy hitting middle bb line and having some trouble

  • ridingwaves

    S out….

  • Mark Shinnick

    Not favored for time being …yeah good your out.

  • ridingwaves

    didn’t want to waste profit on previous trade there….frog tight stop…

  • Mark Shinnick

    …just mulling over a number of charts I get the impression this week’s testing of support is relatively important from longer TL points of view and with lots of option OI in this general zone, so its inflection zone with a bunch of energy for a lot of participants.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • ridingwaves

    CL adding bull seasoning, further complicating shorting

  • http://greenlander1.blogspot.com/ Greenlander

    wash today. stopped out of SPY near open, existing longs PCLN, FCX, INTC bouncing a bit

  • Mark Shinnick

    The curious thing is some unmet upside objectives; this stored energy really would be a nice way to suck in the last bulls and slaughter bears….anyway, just musings.

  • ridingwaves

    I get what your saying, I would think a 30-50+ pt spx day would be the tell

  • BobbyLow

    I think /CL swing trades are in gamble zone (more than usual) for the next few days until the OPEC meeting on May 25th is over.

  • BobbyLow

    Excellent Post Mole!

    I’m a relatively shorter term momentum trader and at least 8 of the 10 Rules you posted apply to me. Bad trading is triggered almost immediately if I avoid these rules.

  • ridingwaves

    Hey BL, meeting might offer a sell the news event or spike up as the price seems to be favoring continued production cuts that Russia and SA have said they will back…

  • OJuice

    OPEC is in a tight spot. I’m not sure that anything that comes out of the meeting can be particularly positive. With that said, it could sell off into the meeting…

  • ridingwaves

    You would think we all have pink ponies and such with the market up here in the clouds, jobs market strong etc….but……….
    Nearly half of Americans don’t have the cash to pay for a $400 emergency, Fed survey finds

  • http://www.captainboom.com/ captainboom

    I’ll bet most of them have a large screen TV or the latest smartphone. Glad that I’m not that person. I have a small TV that I don’t watch at all (information diet), and a 3 year old phone.

  • OJuice

    It might be my money brain looking for correlations, but, it appears /ES and USD/JPY decoupled at the end of the day yesterday and /ES and /CL are following somewhat closely.

  • ridingwaves

    I went 22 days without phone on trip to Peru-Roatan…
    loved it….all you need is a little journal with flight, hotel confirmations….

    but I do believe your spot on above….inflation in the thinks you need, deflation in the things you don’t….

  • ridingwaves

    CALA is painting 37 on PF charts…double top breakout today….

  • OJuice

    Those mole signals are going nuts today. Mole any insight you can provide for us on they type of conditions that result in lots of tightly clustered signals?

  • OJuice

    Nice. Thanks for sharing.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://evilspeculator.com Sir Mole III

    Sorry mate – I’m on vacation, remember?

  • ridingwaves

    just above the breakout would be better entry….15-15.10
    not sure it will come back….

  • OJuice

    Oh yeah. Enjoy the rest of it.

  • Mark Shinnick

    Hmmm…maybe that was your implicit answer :)

  • http://www.captainboom.com/ captainboom

    Recall they can be ignored on a Trend Day.

  • OJuice

    Yes I have ignored them. Just interested to know if there is any specific type of behavior in the internals. Water cooler talk.

  • http://evilspeculator.com Sir Mole III

    I’ll talk about it once I’m back next week.

  • Ronebadger

    Flight date and time…please

    If we know your flight number then we can track your flight…then, we can modify our short plays in case there’s a flight delay…just askin’…

  • http://evilspeculator.com Sir Mole III

    5:30pm CEST on the 22nd. Good luck 😉

  • ridingwaves

    me thinks their is some good news coming….

  • Mary

    Sir Mole – the /ES high today just happens to be your inflection point of a few weeks ago. Just sayin’ …

  • OJuice

    Cool thanks.

  • kim

    Nice rule summary, i’ve added 11. rule to myself not to trade indexes only FX. Main reason for that is that with FX i don’t have this bear mentality, With FX I just trade what i see.

  • http://evilspeculator.com Sir Mole III

    Didn’t we talk about these retracement lines?

  • Scott Phillips

    Had a great day hanging out with Mole and our womenfolk yesterday, visiting some of the little medieval towns in Tuscany.

    Good times, good friends. And I can confirm Mole’s game has been substantially lifted in the last few months, very exciting stuff coming for you all on the quant front.

  • Scott Phillips

    That’s a very nice rule. Even all these years later, I still don’t like going long indexes. And when I go long, and it stops me out I get strong feelings of unfairness and frustration.

    Early trading trauma is hard to shake

  • Scott Phillips

    A very easy system that works for this.

    1) A big spike in VIX.
    2) Starts to mean revert by breaking a daily low
    3) Hold until just past the mean on the downside

  • http://evilspeculator.com Sir Mole III

    How are you guys? I’m having an amazing time hanging with Scott and his lovely wife in Tuscany, Italy.

  • Scott Phillips

    All I want for Christmas is a kick in the head from Mole

    https://snag.gy/pZUY7D.jpg

  • sutluc

    Looks like the move there was to flip him over the edge…
    Do moles fly?

  • JH

    Second that.
    Any rules anyone cares to share about re-entering failed setups? Mole’s mentioned it a couple of times in previous posts but I cant seem to formulate clear succinct rules similar to above.. Any insights to help balance my FOMO and eroding mental energy from trying to short NZDUSD?

  • Scott Phillips

    Mole is a really good fighter. Even though I outweigh him by around 30kg he has the edge when we are trading blows.

    I need to take him down to have any chance at all.

  • saltwaterdog

    My rule for re-entering a failed setup is that another setup must present itself, which means I really don’t re-enter failed setups at all. Multiple setups in the same direction carry weight though. I do however view failed setups as a setup themselves, so a position in the opposite direction is often the go. After all there is a message in a setup that “should” go in a certain way and still doesn’t?

  • BobbyLow

    I have the same Rule as Saltwaterdog. I would add that if I get a failure, and I flip and then it too fails during the same day, I’m done for the that day.

  • Mark Shinnick

    I see this as a market phenomena reflecting the human condition. As a phenomena, it strikes me as having a similar emotional effect as Narcissism; natural defenses don’t work because by its predatory nature it is optimized to overcome those.

  • BobbyLow

    Everyone must be on vacation today.

    In the mean time, “there’s gold in them thar hills”, NUGT’s them is. :)

  • CandleStickEmUpper

    Looks like a slow drift upwards today

  • http://evilspeculator.com Sir Mole III

    Hey guys – I just got home!

  • http://evilspeculator.com Sir Mole III

    I’m back!

  • http://evilspeculator.com Sir Mole III

    And taking me down he did!

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    Apparently nobody missed me. (booking new flight)

  • http://www.captainboom.com/ captainboom

    Too damn busy to miss you, or to trade. Glad you had a good trip though!

  • Scott Phillips

    Yeah I WILL squash what I can catch!

  • Mark Shinnick

    Gravity’s trend being Scott’s friend.

  • ZigZag

    You’re back, and the vix is at 10.95. Coincidence? I think not.

  • CandleStickEmUpper

    And the market is back to its pre-Wednesday-biggest-drop levels. lol.

  • http://evilspeculator.com Sir Mole III

    hehe

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Scott needs an avataar.

    http://i.imgur.com/pmYLWTh.jpg

  • Yoda

    He has the perfect fit for playing Drax the Destroyer

  • Tomcat

    This takes me back at a time in my life when things were a lot simpler (in terms of job). When fighting professionally all I had to do was get in the cage and beat my opp. I happened to be pretty good but even the few times I lost, I knew exactly why. Trading is by far, many times harder. Its you against many. the playing field is not leveled, and often times when you lose or win, its hard to pinpoint whether was due to skill or randomness..

  • http://evilspeculator.com Sir Mole III

    He’s like 90% of that – no joke. I have fought quite a lot of big guys and am usually able to run circles around them. Training with Scott is fun but at the same time he scares the shit out of me despite the fact that I know he wouldn’t hurt me. Super dense muscle tissue – none of that mirror muscle you usually see at the gym.

  • http://evilspeculator.com Sir Mole III

    He looks a lot like him actually.

  • Scott Phillips

    LOL!

  • Scott Phillips

    Fought in the cage? Awesome!

    Trading is way harder, I agree. To me, it feels like unwrapping layers of the onion. Mole and I were talking about it, back when we actually thought we were good pre 2012, we really didn’t know what we were doing.

  • Scott Phillips

    I wouldn’t hurt you 😉 Just get close enough for me to give you a widdle cuddle!

  • Scott Phillips
  • Scott Phillips

    I used to trade Gabriel’s systems, which are more discretionary than mine, and the rule he used was

    One reentry attempt is allowed. After than no more trading that instrument for the day.

    Ken Long also favours one attempt at reentry, saying “reentry is the key to sanity”. If he catches a runner but gets out early, he’s happy to get back in.

  • JH

    Thanks for the replies. I have found that my failed setups do turn profitable to the tune of at least 1R if I had flipped instead of merely stopped out. (possibly a cognitive bias, but has happened the last 5 times in a row.. i also mentally lose track of the failed setup after that)

    However, my main problem with this approach seems extremely suboptimal, given that my entire conviction for this new flipped trade lies with a price level being breached (my SL). Beyond being initially profitable, it opens up a whole new pandora’s box trying to monetise a trade that I have no experience/edge trading.. Slap on the initial mental belief that the original conviction was for a trade the other way, to me it seems to add up to be a very challenging setup… how do you all manage that?

  • saltwaterdog

    The belief structure comes through the backtest and the stats which you might want to grind through. The initial hypothesis is pretty straightforward, taking a trade in the opposite direction of an initial entry once being stopped out is a bet that you aren’t the only one on the wrong side of Trade 1. You have at least a partial belief that there is 1R to be had by flipping your position (stop-and-reverse), why not test that over a legitimate sample to see if that is the case? After all, the notion that it might be possible to reduce your losses by X% by being able to pick up 1R on a reversed position Y% of the time has to be interesting enough to investigate…. the issue of course would be if your initial entry had no real testable framework, ie rules. if you don’t have a way to go back and know exactly where you’d have gotten in, then this becomes difficult.

    Also, if you keep trade records of your entries (a must) and you have enough of them, simply go back through those charts and see what there is to see.