The trading chief at a $3.3 trillion firm explains why investors shouldn't trust their guts as market turmoil worsens - and why they should 'trade small' instead

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The trading chief at a $3.3 trillion firm explains why investors shouldn't trust their guts as market turmoil worsens - and why they should 'trade small' instead

Randy Frederick

CNBC

Randy Frederick, vice president of trading and derivatives for Charles Schwab

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  • Randy Frederick, the vice president of trading and derivatives for Charles Schwab, says he tells investors to "trade small" when the market gets volatile.
  • Frederick says traders often react to turbulent markets by making bigger bets to wipe out their losses, but that just sets them up for more suffering. He urges them to step back and avoid making mistakes.
  • He also says investors should think twice about how comfortable they are with taking losses, because he suspects many of them have less risk tolerance than they think.
  • Click here for more BI Prime stories.

For a trader in the red, the pathway back to profits always seems so clear: One trade, or a few smart moves, and everything is right again.

But when the markets are volatile, that can turn things from bad to worse. Randy Frederick - vice president of trading and derivatives for $3.3 trillion brokerage Charles Schwab - says that when stocks are going through big swings, he often sees investors trying to quickly wipe away their losses.

"People will make emotional decisions to avoid losses, and take larger losses than they should," he told Business Insider in an exclusive interview. He urges them to do the opposite: "If you trade smaller, those losses won't hurt you as badly."

Frederick's view is that as volatility rises, it becomes harder and harder to get those big catch-up trades right. So he advises traders to accept that they'll take some uncomfortable losses, and instead of trying to turn a profit on every trade or every quarter, make it a priority to avoid making things worse.

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Going small accomplishes that.

"You're probably going to take a higher percentage of your trades as losses," he said. "You might make smaller profits on your profitable trades, but you'll take smaller losses on your loss trades."

His advice to make smaller trades also applies to measuring out long- and short-term investments.

"If you want to trade actively, you should carve out a slice of your portfolio that's not greater than maybe 20%," he said. "The other 80% should be there as your long term plan that's tied to your life's goals."

Read more: A chief wealth adviser overseeing $170 billion told us where he's putting client money as a turbulent environment rocks markets

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There's a second reason to keep your trades to a minimum, in Frederick's opinion: No matter what result you may have gotten on an investment survey, you probably can't tolerate as much risk as you think.

"The longer we go through a growth phase, and the longer we have bull markets, the more comfortable people get with the idea they have a high risk tolerance," he said. "It's easy to say that you have a high tolerance for risk when you haven't really experienced any risk. You haven't experienced the negative side of risks, which is losses."

Frederick said that when the market gets rocky, perspective is vital. Not every patch of volatility turns into a correction, and not every correction turns into a bear market.

But when major downturns do come, Frederick says investors don't have to be all that patient in order to see positive returns again.

"The average bull market lasts over five years," he said. "The average bear market lasts less than 18 months."

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