When you're a trader, a period of extreme volatility and market crisis can mean feast or famine, on a huge scale. The increased volatility provides a myriad of opportunities, but at the same time it can destroy a record of good performance in a fleeting moment.
If you're a trader working through this environment, what you need to know is that many traders' careers are forged during these crises. This is when you will really learn your job. A market shock is a great learning opportunity: while some people are running scared others will be turning this into the greatest opportunity ever. For some people, it will become a lesson in losing well. Either way, trading through a crisis leaves an indelible mark on most people.
Whether the sharp sell-off in equities of the first couple of weeks of 2016 becomes a full blown market crisis is of course unknown, though currently the omens are not good. As an ex-trader, and now a trader performance coach, I have traded through a myriad of crises. - You can argue that they happen every few years – from Black Monday in '87, to the '94 bond bear market. And from the late '90s Asian crisis, the tech bubble of '01, through to the global financial crisis of 2008. If you’re a junior trader and you want to survive whatever’s coming next, here’s how I suggest you go about it.
Before you go into this battle, you need to set yourself some basic rules of engagement. Plan your trading strategy, set yourself some stop loss rules, work out how much money you're prepared to lose and the risk/reward ratio. Stick to your plan.
Many traders, even seasoned ones, get attracted to the extreme volatility associated with a crisis like a moth to a flame. Within this volatility lies enormous opportunities but also deadly traps.
Entwining your ego too much with your trading view is a surefire way to get yourself into trouble. You need to remain rational. Keep your ego in check; this is going to get you as much as anything. There is an apt saying; ‘It’s not the market we have to overcome, it’s ourselves’.
Keynes famously said that, "The market can stay irrational for longer than you can remain solvent."
This quote is never more apt than during financial crises. The markets may seem mad: they are. Accept it and move on. If you can accept this, it will be easier to take advantage of the market, and you’ll be less likely to fall victim to it.
Lastly, try and learn lessons from your failures - small and large. I have a client whose trading was decimated in the '94 bond bear market. He made all the mistakes listed above, and more. And then he went away and evaluated his errors and actions.. He got ‘back on the horse’, and went on to forge a career as a phenomenally successful trader.
And finally. – Good luck, you are going to need it!
Steven Goldstein is a former senior rates and FX trader at Credit Suisse, an associate director at Commerzbank and a senior prop trader in the rates group at American Express. He’s now a trading coach with Alpha R Cubed and Chrysalis Performance Coaching.