Geopolitical risk has become a significant factor affecting markets as the  levels of uncertainty and surprises that are emanating from the European Crisis have sent markets both reeling or soaring. Recently former Greek Prime Minister  Papandreou suddenly announced they Greece was going to have a referendum  and stock markets in  North America took a beating. This week it was Italy center stage. Tyler Bollhorn,  in Michael Campbell's opinion, has done a fabulous job of educating investors on markets, trading markets and managing risk. Michael caught up with Tyler Bollhorn and asked him about Geopolitical  uncertainty.

Tyler: Actually I think that you can use that to your advantage. Normally when we think about investing, we think about whether to buy stock, commodities that sort of thing and historically playing the hot market is what has allowed you to make money. Over the years and I made a lot of money during Bre-X years in mining stocks, a lot of money in Tech stocks up until March of 2000 and then of course real estate was just an amazing market until 2007. The question now is what is the hot market and the hot market today is uncertainty. Really what that means is price volatility and nowadays because of ETF's and all these derivatives that we have in the world, you can trade volatility whereas normally you would trade stock or commodities. The hot thing to trade now is volatility and that’s what I was doing all this week with great success.

Michael: That level of uncertainty is translating into huge volatility, how specifically are you playing that?

Tyler: You’ve probably heard of the VIX the Chicago Board Options Exchange Market Volatility Index which is based on implied option volatility and there is an ETF. The most popular one is S&P 500 VIX Short-Term Futures ETF (VIXX) which trades in American stock exchange but there’s many derivatives of that. Here in Canada on the Toronto exchange there’s something with the same symbol VIXX and then there is also a Horizon fund which is a leveraged version where you get two to one leverage, the symbol for that is HVU.TO. So those are the things that I trade for volatility. Now believe it or not that market is predictable, when you talk about Berlusconi stepping down or the referendum being called the market told that story the day before, that volatility was coming. We have to keep in mind that there’re millions of people playing the stock market and there’re some people that have insight that you and I never have and certainly big hedge funds that follow what’s going on over in Europe. They get an inkling that something is going on and they start to hedge their bets in the options market and that shows up on the VIXX. So when I traded, I don’t claim to be an expert on options. I just focus on the VIXX ETF and the different derivatives of it, that’s how I’m trading and I had great result last week doing that.

Michael: Well one of the things that we have to admit is that it’s not business as usual and the most toxic part of that is people who continue to see the world through the same political lens for the last 20, 30, 40 years are missing opportunities with their investments. You can’t just say I don’t do options or I just don’t do exchange traded funds. These are some of the tools you need because they create opportunity and they may create protection by reducing risk.  The message I am hearing from you is you have to use some of these tools to be successful in investments, and take the time to learn them too.

Tyler: Actually the nature of markets is that people always doubt the hot market in its early phase. I can remember so many doubters about gold. Your show was encouraging people to look at gold and silver but because gold had been a dead investment for so long people doubted it. The same can be said of just about any hot market so that’s good because it is eventually the psychology that drives the market higher as more and more people jump on the bandwagon. Well if you jump on the bandwagon late in the trend then you get burned because you end up holding the bag at the end. What’s important to think about is what the hot market is now and get into it now. Also learn how to manage risk because you’re not always going to pick the right thing. Right now the hot market is volatility. I’m also sensing that there’s a bit of heat coming into the oil market, its not quite there yet but it’s getting there so that’s what important.

Michael: It’s interesting to hear you talk about these different markets and that oil is on your radar screen but you’re not ready to commit money to it yet.

Tyler: Right, I spend hundreds of hours coming up with strategies and at the end of the day the strategies are very simple. But how you apply them and where you apply them is what takes that time to figure out. When I do my talk at your conference next week I’m going to go through the process of how I came to know that volatility is the thing to trade right now. Also how I arrive at my rules to trade and how I arrive at my rules to manage risk. Leverage is a double edged sword you have to be very careful with. I’ll also demonstrate how I use leverage because if you pick the right market and have the right strategy you can make a lot more money because of it.

Michael: The market is just such a fabulous thing.  There’s so much depth, it’s just layer upon layer. I think it was George Goodman who said that if you don’t know who you are, the market’s a very expensive place to find out. Your experience of not only handling your own money, studying the market for hours on end,  training so many people and hearing their stories all goes into your bank of experience and how to play the market.

Tyler: It’s such an education for me to teach people because you really get a sense of what drives people’s decision making. After teaching a few 1000 people I really get a sense that people are generally all the same. We all have an emotional attachment to money for the most part and we make mistakes because of that. We tend to sell our winners too early and hold on to our losers. Those tendencies are very predictable and if you understand that they are predictable then you can understand how you can make money from them. They tend to play out in the market and how markets move so when I look at something like the oil ETF I’m looking at that behavior. I’m doing it through the lens of having taught so many people because I know how human psychology is going to react as the market goes up, retraces, hits a bottom then goes up again. These are very predictable cycles and you don’t have to have a tool box full of very complex tools. You can use some really simple things,  but you have to play the hot market. If you play the hot market anyone can make money, you just have to have some simple ways to do it.

Michael: I’m always astounded by how many times I have repeated the same mistakes in my own account and I'm not being phony. What I find about professionals in the investment business is that there is a level of humility that comes with it because there are significant lessons to learn. One of them, Tyler’s outlined a moment ago,  is if you can get over yourself. That’s probably the biggest one. That maybe true in all areas of life but in this one we get a score card on a regular basis. We are also in a phenomenally difficult environment given the level of uncertainty and the level of unknowable fact. You suddenly get a Japanese earthquake, or this geo-political risk when you can suddenly get an announcement that will really impact your investments.

Tyler, you made a trade this year and I'd like you to give us some background on it.

Tyler: The first question is what defines the best trade? I mean I think most people would say it was the trade that made the most money, but I don’t think that’s necessarily all that a best trade is about. I talk a lot about battling emotion, I’m always struggling with fear and greed, should I hang onto this position even though its telling me to sell or am I selling this thing too early because I want to lock in that profit. So to me the best trade I made this year was a short trade I did on gold in mid August. It was only a two or three day trade and not only was it right and I made a great profit,  I executed it according to my plan to mere perfection.  By that I mean I entered when the market told me to as gold was hitting new highs and even though the headlines at the time were saying gold was going onto a 2200/2500. I remember Goldman Sachs put out some research saying gold is continuing higher but the market told me that gold was going to break down and go lower and so I shorted gold. Two or three days later I covered that short made a great profit. I covered it when the market told me to, I executed my plan perfectly and that to me is what makes a great trade.

Michael: You have a methodology, you have an approach, you blocked out all the other noise and you followed your plan to a T and obviously it worked. That’s the challenge that we all have.

Tyler: I have been trading for over 20 years, I don’t want anyone to think that’s its ever easy. It is a challenge every day.  I mean reading the market is not hard, applying a set of rules is not hard, but managing your emotion and overcoming fear and greed, I don’t care how long you have been trading that’s always difficult and the best traders are the ones that overcome that. Don't think that I don’t battle that every day.