TRADER: 'Volatility is like a flame -- it attracts traders like moths, and then burns them'

Picture: NASA/JPL artist concept

Last week’s Brexit vote always had the potential to deliver the type of market reaction that we saw. The collapse of the British Pound and the selling on the FTSE and other stock markets and buying of gold, bonds and Yen was entirely predictable to those traders not blinded by the feeling they needed to be right on the Remain trade.

But where to now?

Stocks are higher again but gold is hanging tough. Sterling is still below the GFC lows, yet copper – seen as a proxy for global growth – is at two month highs. It’s a confusing time.

We wanted to know how professional traders are handling this confusing market. Earlier this week we spoke to Nick Radge, a 3o year veteran of the markets, and yesterday we spoke to Assad Tannous, the founder and head trader at Melbourne based Asenna Wealth Solutions.

Assad is well known on Twitter, under the handle @AsennaWealth, sharing his views on markets and experiences and wisdom he’s learned trading for more than 10 years.

Here’s what we talked about. His final comment is excellent.

Business Insider (BI): How did you change your trading style in the days or weeks leading up to the British EU vote?

Assad Tannous (AT): Just prior to the Queen’s birthday holiday we sold the majority of our midcap and top end stocks and decided not to add to any new positions.

Based on the way the market acted after this period its safe to assume so did most market participants. If you’re going to panic, panic earlier than the rest. I’m a firm believer of staying in control and always avoiding scenarios where risk cannot be managed.

Selling a stock and watching it rally really hurts, holding a loser and watching it fall hurts a lot more. Once a stock gaps down beyond the point of no control the decision to sell becomes no better than a coin toss. Always remain in control.

BI: Why do you think that markets reacted so poorly to the news that Britain had voted to leave?

AT: The market like us had factored in a Bremain vote. Most bookies, who tend to be correct more often than not, had the Bremain vote as a clear winner. The S&P 500 had rallied from 2050 to as high as 2125 heading into the vote and like most market participants we thought the news had been heavily discounted and that we would sell off 20-25 points on a Bremain vote. When the unexpected occurred and Brexit won the popular vote, the markets then had to wind back the Bremain discount and the Brexit outcome, hence the savage reaction.

BI: What type of trading environment do you believe traders are facing now and over coming months?

AT: Seeing the US market are selling off from a major range resistance we believe the move from here will be a gradual decline into the neckline and long term trendline support at 1840. That’s because the S&P 500 has been in a clear distribution pattern since the second quarter of last year. Keep in mind when markets top they do not just reverse and crash, they tend to distribute for months and sometimes even years.

BI: How does this market environment impact your trading, if at all?

AT:Seeing that there has been an impulsive move to the downside from the top of the range we will look to sell remainder of our equity positions into strength in addition to looking for an index short position. Historically range moves tend to grind but we have seen a savage inter-range correction on the S&P500 since August last year.

BI: If you could share one insight with traders who have never faced these types of markets before, what would that be?

AT: When the markets get like this your number one priority should be wealth preservation. The positive psychology that comes from limiting drawdowns [losses] in this kind of market cannot be overstated. Expect volatility to spike and we will wind back when volatility increases. Volatility is like a flame, it attracts traders like moths and then burns them.

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