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So how are the financial markets making you feel this week?
Hey is Adrian here from Enlightened Stock Trading…. As I record this video we’ve had a week of extreme volatility, all sorts of craziness and a whole lot of uncertainty in the financial markets. So I just thought I would record this video and give you a bit of a de-brief on what’s going on and what you can do about it to make sure that your trading doesn’t suffer in the future when we have weeks like this.
We will have more weeks like this because there’s nothing more certain than the markets are uncertain! Volatile markets become quiet markets and quiet markets become volatile markets. And so we need to be prepared for all the crazy things that are going on in the financial world for you to trade consistently and profitably.
So first of all let’s have a look at what’s going on in the market this week as we are recording this video….Now you may be watching this later but this is still a perfect illustration of how to think about your trading so that you can make money consistently over the long run because the most important thing in this game is that you treat it as the long game.
We’re not trading here for one or two days or one or two week’s worth of profit. What you need to be doing is trading so that you can be profitable over 10 15 20 years. So for that we need to change your thinking to make sure that you’re prepared and understand what’s likely to happen.
So check this out here on the screen. You’ve got the chart the daily chart of the S&P 500 index and as you can see the chart the week has been absolutely crazy. We’ve had a couple of really dramatic down days and a whole lot of volatility over the last three or four days. As you know at the time that I’m recording this video. Now what’s interesting is there’s all sorts of news in the media is articles talking about crashes.
There’s these Facebook posts about traders who have blown up and lost millions of dollars and all that sort of stuff. All that’s happened is the S&P has dropped by about 10 percent as at the time that I’m recording this video and just 10 percent is enough to cause the whole financial media to go haywire and ape-shit (pardon the expression) because you know what we’ve had recently is a really low volatility environment and people who got used to that.
But the fact is this is pretty normal.
It might feel crazy right now but we have declines and corrections like this very regularly in the financial markets. It doesn’t matter what you trade. There’s often shocks and unexpected events which cause rapid DECREASES or corrections in the price of the instruments that are trading. So that’s what’s happening on the S&P right now.
Let’s have a look at the VIX the VIX in case you haven’t seen it before is just a measure of the volatility in the American stock market. So the lower the VIX is the more stable, the more calm the more confidence there is in the market and the higher the VIX is the more uncertainty there is around and therefore also the more expensive option prices become.
So in a really quiet low VIX environment the market tends to move very smoothly and steadily in a correction or a stock market crash or a bear market. The VIX tends to spike and be really high. And so this is what happened this week. So you see that from about the 16th of January for the last couple of weeks of January it was really really quiet. I mean we’re talking almost single digit VIX numbers which is really really low if you if you think about the last 10 or 15 years of what this index has done. But then in just the space of a couple of days towards the end of this week the VIX spiked up to around the level of 58 which means basically in the space of about three days the VIX went from the low double digits all the way up to 50 so it’s a very dramatic expansion in volatility.
Now again if you if you just take the last couple of weeks this looks really unusual. But you know if you think about much longer term it’s not unusual at all because fear comes to the market really really quickly and if you want to profit if you were to be consistent and your trading over the long run of a 10 15 20 years you need to be prepared for things like this to happen because the market changes very suddenly.
So are you ready?
I mean have you thought about expansion of volatility about dramatic changes in market sentiment over a short space of time for your trading and are you prepared to act consistently and profitably in those environments?
What else is happening right now is a lot of talk right now about this Inverse VIX Exchange Traded Fund (ETF) that has just blown up. It is called XIV. Because we’ve been in such a low volatility environment for a couple of years now to be honest this trade has become really really popular. The trade is basically shorting volatility. There’s been ETF exchange traded funds pop up that allow you to short volatility or benefit from declines in volatility. Now there’s this one fund that, if you look over the space of over a period of several months what you can see is that you know this this inverse volatility fund has been trending up slowly and steadily. This has become a really popular trade because to be honest it’s been easy money you know because if you had bet that any small increase in volatility that it would decline back to single digits or back to low levels that would have been easy money over this time…
…But look what happened! With so many people in this trade, over the last couple of weeks with the volatility expansion this inverse volatility fund has completely blown up. It’s gone from about high here of about 100 almost 150 and in the space of a couple of days this week it’s gone to basically zero, all the way down at 5. Now this fund is going to stop trading the bank that’s listed this fund has announced that it’s going to be closed. So this is the sort of thing that’s happening, it’s wild volatility out there.
If you’d if you’d have looked at this fund just a couple of weeks ago you’d be thinking this is an amazing trend. What a great opportunity to trade. But look what happened. Now this is this has hurt a whole bunch of traders and even posts were going around on Facebook about this trader in Singapore who lost 4 million dollars in the space of a day because he was highly leveraged in this product. Now that is just crazy and you know the reason he lost all his money is because he broken all of the trading rules in the book:
He was over leveraged.
He was highly concentrated.
He had a trade that had a huge catastrophic risk that he wasn’t prepared for and hadn’t hedged against.
His position sizing was all wrong.
So you know those are all the classic mistakes, and when you make all the mistakes in the book in a highly leveraged way and you don’t understand the instrument that you’re trading, that can basically blow up your account in a single trade. That’s what this guy did.
There’s a lot of talk out there about the crypto market at the moment crypto currencies and bitcoin and so on. Now check this out. In the last month or last couple of months the Bitcoin price has dropped from almost $20,000 U.S. dollars (usd) down to a low of under six thousand dollars. At the moment is around 8000 something like that. Now look this market is hugely volatile and it changes really really quickly.
What I’m doing is illustrating the amount of uncertainty that’s going on in the market right now. And when you see this how does this make you feel about your trading and your investment decisions. I know people that have bought bitcoin at $15000, $17000, $20000 USD a coin and now they’re watching it ride all the way down.
How did you prepare for this sort of thing?
How do you prepare in your trading for this sort of spike in volatility?
How do you prepare for a drop in the S&P that happens this quickly in an expansion of volatility that happens this quickly?
Are you prepared?
Well for the next couple of minutes, I want to talk about four steps that I’d like you to take in order to prepare for this type of market condition so that your trading can improve and you can benefit from this knowledge next time this sort of craziness happens in the stock market.
So how do you prepare for a week like this in the financial markets? How do you prepare to make sure that you’re ready when the volatility spikes when the market goes into correction mode and does things that you don’t expect?
The first thing you need to do is maintain perspective. Now here’s what I mean. This is what’s happened on the screen here in the S&P 500 in the last week. But perspective when you think about perspective what I want you to do is zoom all the way out and just have a look at what has happened in the market over a long period of time. Now look we are in the longest bull market in history. And since 2009 the market has performed astronomically well. The U.S. stock market at least. When you put when you put the current correction which is only down 10% as I am recording this video from its peak. Now when you put that into the context of the entire bull market from 2009 to now it’s actually not that big of a deal. And even over the life of this bull market you’ll see several points in time where there’s been a correction. Nothing so significant in this bull market because there’s only been very pretty small pullbacks in this market since 2009.
But you also got to think about more broadly what happens in the stock market let’s get all the way back to 1990. So here you’ll see that yeah that was a big strong bull market in the 90s but then in 2000 to 2002 the market went into the dot com bust and there was a couple of years where the entire stock market was down heavily over quite a couple of years. And then there was another bull market where it came up to the all time highs again ultimately in 2007. And as you know we had the financial crisis global financial crisis and the market got hammered again for the next 12 months and then that launched the next bull market that we’re now in now.
Are we at the end of this bull market?
I don’t know, It’s too early to tell. But you know what I want to impress on you is that a correction in the context of a massive bull market like this should be completely expected. If this thing takes you by surprise then you haven’t really thought deeply and long term enough about the stock market.
I mean if you’ve only been looking at the stock market over the last couple of years you could be fooled into thinking that what’s happened now is a catastrophe, a disaster, a crash. But in fact it’s not it’s just a very minor correction in the grand scheme of things… and it can get much much worse.
I mean if you were trading in 2008 and or in 2001 you would have seen far more dramatic declines in the stock market than what we’ve had just this week.
So keeping it in perspective, yes we’ve had a correction and the stock market is down 10 percent. It could get much worse or it might recover and get better. We don’t know yet – It’s too early to tell but if you’re not ready for big declines like what happened in 2008 what happened in 2001 then you haven’t really thought long term enough about the stock market.
I really encourage you to look longer term in your share market analysis. In all of your charts that you study you should zoom right out and have a look at the sort of behavior that happens in the long run to make sure you’re prepared.
The VIX is another really great example of why you should look longer term to get greater perspective. We’re talking about this low volatility environment that we’ve been in and this is what’s been happening over the last almost year or so. It’s been really low seeing double digits and it’s even dropped into single digits for the VIX which is very very low volatility and then we had this spike up to 50.
Now again if you only looked at the markets over the last year you’d be fooled into thinking that what’s happened now is abnormal or unusual. Well it’s an extreme event but if you have perspective, if you zoom out and have a look at a much longer term sense what happens in the market. This wouldn’t catch you by surprise at all. In fact you would be expecting it.
Let’s zoom right out on the VIX. OK so this chart shows data all the way back to 2000 and in late 90s. There we go. So what you can see in the VIX chart is that there’s long periods of low volatility but there’s always volatility spikes! Something always happens to spook the market at irregular intervals and the volatility spikes.
So if you’re betting with your entire net worth or you are highly leveraged expecting that volatility is going to stay low then you’ve got to be aware that things like this can happen. There is quite often volatility spikes to around the 50 level – every couple of years and in 2008 the VIX went as high as the high 80s! Now if you were short volatility and highly leveraged when that happened it would basically blow you up and you would lose your entire account in a couple of days.
That’s what happened to this guy on Facebook who once posed is being shared on Facebook where this guy in Singapore lost 4 million dollars overnight because he was betting that volatility would drop and he was betting on it in a big way. When volatility spiked as you can see it always does. He lost everything.
So if you’re freaked out and if your financial results are terrible because volatility has spiked you need to get a little longer term perspective. Have a look at the chart of the VIX and just realized that at irregular intervals in time, volatility is going to have a killer spike.
If you find yourself in a really low volatility environment that’s great. You can make money while that’s happening but just remember that will come to an end and it will come to an end quickly. So that’s perspective on the VIX.
Now let’s talk about bitcoin and crypto currencies. Now this is all the rage right now. People are talking about bitcoin going to a hundred thousand five hundred thousand or a million dollars a coin. I don’t know if that’s going to happen. But by the same token there are other people who are freaking out because Bitcoin has dropped from $20000 down to $8000 which is a very significant decline.
Now this is a huge decline, but look at where it’s come from…in 2015 down here it was at 100 something dollars a coin and it hit $20000 just recently. So with that sort of astronomical rise of course there’s going to be some volatility in the trend and there’s going to be big percentage pullbacks. So you have to realize what is happening in the instruments that you are trading. In bitcoin when prices have skyrocketed so much by huge triple and four digit percentage gains in the space of a year.
Over the history of Bitcoin there’s been some big harsh scary declines in the market. As the excitement and enthusiasm comes off, people panic they dump their bitcoin and then eventually it will it will stop declining and it’ll go on for the next rise.
So is the bitcoin bull market finished?
I don’t know it’s too early to tell. All I know is right now we’re in a massive correction phase and the market is down well over 50 percent and it could go further. But I see people on Facebook and on chat forums and on groups that talk about crypto currencies. I see people talking about the last couple of days and say look the corrections over because we had a couple of up days in the Bitcoin price. That’s just short sighted again they’ve got no perspective because they are drawing this conclusion based on just three days.
You’ve got to put into the perspective of the medium term trend that’s happening right now. When you look at the Bitcoin price you can see it is getting hammered. Now will it come back – probably. But right now it’s way too early to tell whether or not it’s going to come back.
So perspective is the first thing that you need in order to survive things like this. Understand what your markets do what they could do and what’s the worst thing that could happen.
The second thing you’ve got to do in order to survive markets like this is to avoid emotions creeping into your trading. Now again I spend a lot of time on Facebook groups that talk about stock trading and trading in general and want to see over and over again is people panicking. You know something unexpected like the decline in the S&P happens and people are panicking “what should I do?”, “when do I sell?”, “Is it at the bottom of the correction?”
These are the sort of questions people are asking. They are questions we all ask, but if you’re if you’re making decisions based on the emotions that that’s generating you’re never going to make money. You’re never going to profit in the stock market in the long run.
So how do you get around that when you get over these emotions and start making decisions objectively and clinically?
To do that you need a stock trading system!
A trading system is just a set of rules that guide your decisions in the market. For example, if A and B and C happens, you buy. If D or E happens you sell. The decision is not up for debate. You don’t have to ask your thousand friends on Facebook should I sell, you don’t have to ask the latest cryptocurrency group, you don’t have to read your stock tips newsletter and find out if they want you to buy or hold or sell.
A trading system guides everything that you do in the market. So if you have a trading system it takes the emotion out of your trading. So that means is you can make money consistently with less stress because the emotions are down and the emotions are down.
So you know if you’re following a profitable trading system consistently over 5, 10, 15, or 20 years you can make money consistently in the stock market and you’ll be worried less about weeks like this.
If the market is in turmoil and you’re stressed and you’re struggling and you’re worried about your positions then I would encourage you to think pretty hard about creating your own stock trading system so that you have some rules to guide you when things get hard. It’ll make all the difference in the world!
When I when I created my first stock trading system (over a decade ago now), I turned on the system and all of a sudden trading just got easy. You know you wouldn’t believe it because I was spending hours and hours analyzing charts and stressing of my positions and trying to decide how much should I buy this stock and how much should I sell that stock and what’s going to happen. But when I implemented a trading system all of that subjectivity went away. This allowed me to just say OK A and B and C happened so buy. about that much and then I’ll hold the position.
The great thing about that is you can make more money in less time with less effort and less stress. That’s what a trading system does for you. It also takes away the emotion and the fear and the anxiety that weeks like this in the stock market cause.
So think very hard if you if you’re not already trading systematically I encourage you to think really hard about whether putting a trading system or finding a trading system would really help your trading. I think for the vast majority of people systematic trading is going to be far more profitable than trying to trade subjectively looking at charts and making judgment decisions and taking information from multiple sources. Because frankly human beings are just not great traders. You know you might think you make rational decisions but you know money is an emotional subject.
When your emotions are up your intelligence is down and it’s very hard to make consistent decisions. So systematic trading will really make the difference for you if that’s if that’s the situation you find yourself in.
So the third thing that you need to think about or do to make sure that you survive markets like this is to think really carefully before you take “sure thing” trades.
Over the last couple of years the short volatility trade has been a sure thing. All those little volatility spikes have reverted back to low levels of volatility. The spikes have been really small and so it’s been really profitable.
It’s just like in a bull market if you if you sell put options all out the bull market you make a ton of money. It’s consistent because you take in premium every month or every week. But what happens to that strategy when the market gets volatile. If the market crashes 30 percent overnight or in the space of a couple of days you know that sort of volatility will cause your strategy to blow up and you could lose your entire account.
You don’t want that to happen!
You don’t want to have that risk that one day you know an unexpected event could come along and just wipe out your entire trading account.
Surviving for the long term is my number one priority.
Yes I want to make money and make money this year. And I want to make money over the next five years. But no matter what happens the most important thing for me is to stay in the game! If I lose all of my money, if you lose all of your money you can’t stay in the game… and if you’re out of the game you’ve lost. The only way to win is to stay in the game!
So when you take “sure thing” trades where you know it’s a very high probability of success. Before you do that. Think really carefully about what is the worst case scenario the worst thing could happen because the worst thing that could happen is probably pretty scary.
If your short volatility at low levels, in the VIX then you know something pretty scary can happen because if the VIX spikes to 50 or 60 or 80 like it did in 2008 you can lose a lot of money very quickly. As we saw on this week’s chart, volatility spikes really really quickly. So you know think really hard before you take “Sure thing” “Can’t lose” trades. Make sure you understand the worst case scenario that can happen.
The fourth thing is that I need you to realize is that even when things are going well, a lot of traders fool themselves into thinking that they’re geniuses because they’re making a lot of money and that’s great. You can make a lot of money and you should make a lot of money in these markets. But here’s the thing if you’re deluding yourself into thinking that you’re a genius and you start pressing it harder and harder, taking bigger and bigger positions, taking higher and higher leverage then you know you’re leading yourself down a really dangerous path. This is because when the nice calm smoothly trending market goes away like it did in in the last week you will have your highest leverage your biggest risk and your highest exposure in the market…and the market comes apart really really quickly.
So when the market is going well for you when you’re making money it’s absolutely critical that you don’t get cocky that you don’t push it too hard and fool yourself into thinking that it will last forever because it never lasts forever. It doesn’t matter what it is. It doesn’t matter if it’s bitcoins in cryptocurrency it doesn’t matter if it’s the bull market that we’ve had for the last (almost) decade.
You could you could look at the market the S&P since 2009 and think wow! We’re clearly in a bull market. This is a new normal. The market moves smoothly it grows consistently and we only have very minor pullbacks.
But if you let yourself believe that you missed the fact that are actually bad markets… I traded through 2007 / 2008 and if you’re not prepared for that sort of bear market if you’ve deluded yourself into thinking that the smooth bull market is the normal then you’re going to blow up and lose everything.
So maintain perspective. You must avoid the emotions creeping into your trading…and you do that by having a trading system that you follow.
The third thing is going to think really carefully about the “sure thing” trades. Think about what’s the worst thing that can happen and make sure that you’re prepared for that. And then finally realize that when things are going well that’s not going to last forever because you know eventually the bull market will turn into a bear market and then again eventually the bear market will turn into a bull market. It’s just the nature of things in the financial world it oscillates.
So if you’re prepared for that mentally and if you prepared for that systematically with your own trading system that you’ve tested through many different market types then you can live to survive no matter what happens.
The sort of correction that’s happened in the last couple of weeks is really going to be relatively minor in your in your trading history. If you do these 4 things then you are not going to be like that Singaporean trader who blew up and lost 4 million dollars overnight.
The best thing you could learn to really bring all of this together in my view is to learn to trade systematically. Trading systematically just means you have rules that tell you when to buy how much to buy and when to sell. Basically objective rules that guide everything you do in the stock market. When you’ve got the objective rules, the great thing is you don’t have to stress about what’s happening in the markets, or what analysts are saying.
That sort of objective systematic trading will improve the performance of the vast majority of traders because most humans to be honest are really bad traders because we’re emotional beasts. If you if you think about yourself you’re probably an emotional being as well. We have to be as part of humanity… and because we are emotional beings, it’s very hard to make good financial decisions. So the quickest way to get profitable and consistent and the easiest way to survive in the long run is to bypass your emotions. You bypass your emotions by having mechanical trading rules that allow you to profit and make the right decisions no matter what’s happening in the market. You could be freaking out because the S&P has dropped 10 percent…and oh my god the world’s coming to an end… but your system tells you to buy or sell and you just follow those rules.
So that’s that’s the best thing you can do to stabilize and make your trading consistent and profitable in the long run. The great thing about having a trading system is not only will probably make more money but you can do that with less time effort and stress.
Less time because it takes about 30 seconds to scan the entire stock market to find the stocks that meet your criteria.
Less effort because you don’t have all of that mental anxiety in thinking and information sorting and everything because the system is doing the work for you.
Less stress because you know you’re just trusting a system that you’ve designed and tested for the long run. You know you’ve if you’ve designed your system properly and you’ve tested it over 20 years of data then you know what’s going to happen you’ve got a very good idea of how the system behaves and what sort of results it can give you.
But how can you develop your own trading system?
Well that’s exactly what I teach in the Enlightened Stock Trader Certification Program but really it comes down to a couple of simple things:
Firstly you have to find a trading strategy that works for you. Something appeals to your personality and then you go to build a set of rules and test those rules. To make sure that they’re profitable. Now you’d be surprised how many strategies are written about on websites and in books and people are trading these strategies but they don’t even work because they haven’t they haven’t tested them!
I’ve tested hundreds and hundreds of strategies over the years. And you know the vast majority of stuff that you find on the Internet and in books and magazines out there it just doesn’t work at least not consistently. So you going learn how to test your trading system, your trading rules and make sure that they are profitable over the long term.
Once you’ve got profitable rules you get to design your position sizing your risk management to help you survive. You’ve got to strike a balance between not taking so little risk that you don’t make any money but not taking so much risk that when something goes wrong your account explodes. That’s the balancing act – How many positions? How big are those positions?
Getting this balance right is what keeps you alive and will help you be a profitable and consistent trader with dramatically bigger wealth in 10 or 15 years time. Because position sizing is the key to survival.
Then finally you’ve got to write your trading plan. You wouldn’t dream of starting a business without at least some sort of a business plan. For trading you need to know things like your trading infrastructure, your risk management, your lifestyle – with different triggers in your life that should cause you to stop trading or slow down your trading.
There’s a whole bunch of things you need to write in your trading plan. So that your performance can be profitable and consistent. Even something as simple as what happens if your internet goes down and you need to place a trade. I mean most traders have not thought about simple stuff that can really screw up your trading results.
In the Enlightened Stock Trader Certification program I take you through step by step everything you need to do to develop and test your own profitable trading strategy so that when you’re finished at the end of the program you are a confident independent and profitable trader.
Now obviously I can guarantee profitability, no one can do that and in fact it be illegal to do that, but there’s different levels of confidence and certainty. Right now if you’re trading without a system and you’re using subjective decisions, the chances are you’re not going to be profitable in a long run.
I’m going to be brutally honest here because most subjective non-systematic traders lose money. But if you develop a trading system that you test over 10 or 20 years of stock market history and you test it in the right way (which I’m going to show you in the program) you’ll have a much higher level of confidence that you’re probably going to be profitable. At the end of the program when you walk away you’re going to be independent and you can have your own system that fits your personality it fits your objectives and fits your lifestyle.
Your own stock trading system will give you the confidence to tackle the markets in weeks like this because you will have planned for in and your system knows exactly what it should do. It’ll give you the trades that you need to take because you’ve developed it and tested it and design those rules so they will be profitable and keep you safe no matter what the market is doing.
If that sounds like something that you’re interested in, if you want to take your trading sway from erratic, fearful and emotions; if you want to eliminate that from your trading and if you want to put in place a set of rules that you’re confident in and learn how to test those rules, challenged them for robustness and make sure that the system is stable over a long period of time then the Enlightened Stock Trader Certification Program is exactly what you need to improve your trading and develop your trading system.
So if that sounds like you, if that’s something you’re interested in click the button below and apply for The Enlightened Stock Trader Certification program now.
On the application page you’re just going to see a couple of real simple questions just so that I can get to know you a little bit more and check whether the program is a good fit for you. I do this because the program is not for everyone. I don’t want to waste your time by trying to teach your method it’s not going to work for you. So just click the button below and fill out the simple application form and I’ll get back to you personally and let you know if the program might be a good fit for you.
There’s no obligation there’s no cost to apply.
Right now the main thing that you need to do is learn how to develop a trading system so that you can improve your trading and make it consistent in the long run.
So hit the button below and apply for The Enlightened Stock Trader Certification program. I’ll see you on the other side!
I can’t wait to work with you and help you stabilize your trading results and help you survive in the financial markets over the long run. I’ve been doing this for 15 years now I’ve taken thousands of trades and I’ve traded on many different markets in all over the world and you know what I found is the systematic approach has made all the difference for me and it will for you too. So hit the button below apply for the Enlightened Stock Trader Certification program. I’ll see you on the other side… Bye for now…