Rules for Trading During a Volatile Summer

This summer was a horrible one to try and make money. In fact, every summer is difficult on the markets. Participants are away, it's not very liquid. Best to stay out.

Summer for me is being lazy, lying by the pool sitting with mainly defensive shares. And sitting with a cocktail. And a paperback. And a masseur – any more than that and it's definitely Too Much Information... (No pigs though, promise).

I also had an indicies short open. As every summer these days there is almost inevitably a major tankdown.

I reckon the worst thing you can do unless you are at your computer all day all the time is actually trade much at all in the summer. I hardly did anything - my portfolios didn't make much and thanks to some shorts didn't lose much either.

But the inexperienced who traded and over-traded during the summer? Well my guess is many blew up their accounts.

The worst thing you can do during a period of volatility is trade a lot especially in the top 300 or so shares where the whole thing becomes like a crazy mad casino and the house will almost certainly beat you and take all your chips. (Mmmm... chips...)

Here's a trader who wants to share his experience - his summer was so bad not only is he finished as a trader but he can't pay the spreadbet firm he owes money to. Here's what he says:

"I think I broke all rules and because of that I'm done with trading, because if I can't be logically then I will lose money. So I've not had a bad run recently on longs and shorts. Making real money and progress, following the charts and flows of the market.

But then decide to invest in a share because it looked cheap, then it fell with the China news, but instead of selling I hung and stupidly averaged down too.

Then on that bad Monday I felt the floor fall away when the markets opened. My positions were closed by the spreadbet firm, any profit gone and now in debt by thousands.

I've never felt so stupid, so now I have to write or call them with a heavy heart to find out how to pay them in instalments, if they do that.

I should never have relied on margin as black swan or market moves like this can punish you, if you don't follow the basic rules."

I suspect my reader's story was echoed around the nation.

What basic rules is he talking about? Where did he go wrong?

If the market is falling either stop out fast or decide you're holding. Never average down. You could end up just making losses even bigger.

But above all, don't overuse the leverage given out by spreadbet and CFD companies. On a number of days this summer stocks fell so fast that if you were heavily leveraged you'd have been called or emailed and asked for money

If you didn't have the money then your positions would have been closed like the trader above and you'd be expected to pay up. If you can't pay up these debts are enforceable by law and injunctions can be taken out against you.

Remember in effect "leverage" is just borrowing money. It's very seductive trying to make back losses quickly - but the market knows and will punish you.

My plan is to always hold excellent companies with low volatility outside of the FTSE, oil, gas, energy and mining. Get out fast if I got an original entry point wrong and hold for years if I get it right to make the big money.

For example if you'd held GB Group (GBG) the summer volatility wouldn't have hurt - I bought these originally at 20p years ago and recently the shares have touched 240p. I averaged up most of the way getting more in the 60s and 120s and even more recently.

Or even a recent buy Empiric Student - (ESP) this one has hardly budged and there's a massive dividend.

Another of my favourites is Powerflute (POWR) - this one amazingly simply stayed still or went up over the summer and I recently bought a load more at 80p even though I've more than doubled on it already having bought at 34p.

All these companies quietly and steadily build their profits over time, are under the radar and so aren't volatile.

If you've got something with Gas, Oil, Gulf, Power, Resources in its name... well, you must expect to be whipsawed out. Perhaps what I am saying is, don't play with hard to value volatile shares in the summer and maybe not at all.

Turning to insuring your portfolio during a summer of volatility - best way is an indicies short using spreadbetting.

Main thing here is to keep stops miles away or else the casino again here will punish you.

For example, you could have taken out a short at say 6,800 as the summer started that would have produced a massive payout to help balance out any falls in your portfolio. In my case I got a nice profit from 6,800 to just over 6,000.

Or, say in an ISA you could use Exchange Traded Funds which go UP if the FTSE goes down such as XUKS or SUK2.

Details on how to use those, FTSE shorts and general ideas on what to do during market falls are in chapter 18 in my latest book Naked Trader 4 "When markets go down".