As of this point of writing, Beijing has shut its schools. Both US and China appears to have their own 2nd wave of COVID19 infections.
So here we are, a few days ago, first news of a possible 2nd wave of COVID19 understandably lit up the volatility in markets.
Looking back in March 2020, the run up in volatility was spectacular.
1) So during CNY2020, the world learnt about a marketplace in Wuhan, China. At that point in time, you have to ask yourself, will it spread? Or will it be contained? This in essence is what is meant by the “hot seat”. You understood why the uptick in volatility. However, the future is not written and cast in stone. No position, no risk. Should you get on the trade?
2) Even if you gotten in on the volatility trade, can you tolerate the “death by a thousand cuts” price decay that followed? Would you have lost patience and conviction for your view that things will get worse? It is easy to say, “I told ya’so” Hindsight is always 20-20, how ironic.
3) Even if you had tolerated the price decay and obtained justification by the run up, have you considered that red daily candlestick and got out of the trade? It’s also near the resistive longer term moving average, full downward candlestick outside the bollinger band. What is your risk profile and appetite for risk, really?
On hindsight, it would really take a gambling mindset and blatant disregard for risk to keep holding on to the volatile trade on the volatility instrument for that big payoff.
MOVING FORWARD WHAT NOW?
The question is whether 2nd wave COVID19 infections will impact markets or not. Will social distancing measures get tightened again to prevent the virus from overwhelming the healthcare systems. The amount of stimulus which the central banks have pumped into the global financial system is unprecedented. There are bull and bear factors tussling at the markets, with new developments each passing day that alter forward projections and their probabilities. How should one navigate?
Position size and diversify appropriately to minimize negative marking impact. If your position size is minimal like a small lottery punt then you can sleep well at night. However, if you poured your life savings into this one bet, or even take leverage for this bet, you had better eyeball the bet every second. Your position size has a direct relationship with the emotional impact of this bet.
The future is not cast in stone. Be adaptive because markets are. There are times passive investing works and there are times active investing works. Forward probabilities are simply not static.
If you appreciate this write up, you understand the challenges of reading to the right side of charts. And if you like what has been written, poke around the other parts of this site and connect all the dots via the links peppered in every article, to deliver one whole consistent design driven craft based financial advisory waiting for you.