Sitting on Your Hands During Volatile Markets

Having the patience to stay on the sidelines, sitting on your hands during volatile markets is vital to preserve your capital.

Sitting on Your Hands During Volatile Markets
A warning sign indicating a dangerous road ahead.

For systematic traders following a rules-based strategy, one of the most important skills to develop is patience. The urge to constantly be in the market, overtrading during every volatility spike or choppy price swing, can be strong. But the disciplined trader knows that sometimes the best position is no position at all. Staying on the sidelines, sitting on your hands when conditions are not favorable, is a sign of trading maturity and wisdom, not passivity.

Volatile, choppy markets are notoriously difficult to trade. Price moves become more erratic and less predictable. Trends break down as conflicting forces push and pull the market in different directions from one moment to the next. In these environments, false signals abound that can whipsaw traders in and out of positions for losses. Even a trading system with positive long-term expectancy can rack up a string of losing trades when volatility spikes.

This is why having the patience to stay in cash during these suboptimal conditions is so vital. It preserves your capital and protects you from "death by a thousand cuts" as volatile markets chop up your account. Just as important, staying on the sidelines keeps you aligned with your trading system. Taking unplanned discretionary trades out of boredom or an anxious need to "do something" is a recipe for losses. It can throw you out of sync with your objective strategy at the worst possible time.

It's important to remember, money is made in the waiting, not in the trading. The best trades come to those who have the discipline to sit tight and let the market come to them, presenting the high probability setups that fit within their systematic strategy rules. Patience and inaction in poor trading environments makes it possible to strike when the time is right and conditions are most favorable again.

So if the Alpha Signals strategy says to be in cash, we must have the maturity to sit on the sidelines. Embrace boredom, don't fight the trend in bad markets, and wait for the fat pitch when our proven strategy tells us to swing at. The payoff is worth it.