The Dog Days of Summer Produce Low Volatility

The months of July and August conjure up moments of relaxing near large bodies of water. These can be lakes, the ocean or just a swimming pool to get some relief from the heat that is at its peak during this time. The ancient Romans called this time of the year “the dog days” because this was when the star sirius (part of the constellation Canis Major or large Dog) would appear in the night skies.

For the financial markets, these months tend to be quieter in terms of both volume and volatility. This is partly due to the fact that many traders are vacationing during the summer months, and as a result , many of the institutions are not fully staffed during this time. There can be a danger in this as with less participation (lower volume) the markets can be manipulated much easier than when the volume is heavier. For traders this can impact where prices are filled sometimes negatively which is what we in the trading arena refer to as “slippage”.

Over the last several months, volatility in a wide swath of the futures markets has been at historically low levels. This is an important factor because as traders we need movement in order to capture profits, and when markets quiet down many traders are challenged because they have to be more patient in finding opportunities. I say this is a challenge because for most traders, patience is an attribute that is often learned the hard way. That is a strong of loses has to happen before a trader decides that perhaps awaiting for quality setups is a better course of action.

Of all the futures markets, the most notable for their lack of volatility are the currency markets. These markets which usually have lasting trends have been unusually quiet over the last several months. This has posed many frustrations for those involved in these markets, especially those swing traders that rely on trends. In addition, the Stock Index futures also have been deficient in their intraday movements. For intraday traders, volatility is essential, as without it opportunities become scarce.

So what is a trader to do when the environment is like what we are experiencing now? First and foremost, as I noted earlier, PATIENCE is critical. Since low risk, high probability, and high profit margins trades are not as abundant it’s about quality not quantity. If you don’t exercise patience you will tend to force trades in a quiet environment. If the markets are choppy and not offering quality opportunities the best thing for a trader is to find another area of interest outside of trading, and go pursue it. This will clear your mind, and get you away from staring at the computer.

Another way to work through this environment is to diversify amongst different markets. Although many of the futures markets are quiet now, there will always be one or two markets on any given day that are moving. One market that I’ve written about before that has been moving lately is the Grains. The one caveat is that you should know any market that you trade like the palm of your hand. Do the work that’s necessary and you will be better prepared to trade any market.

Lastly, in this type of market one must lower expectations. Because we don’t have the bigger moves, the profit expectations should be tempered. In other words, we shouldn’t be greedy and be content with what the market has to offer.

The objective here is to live to fight when volatility comes back, and believe me, it will. So when Volatility does return, the questions for you are: when it does, will you be prepared? And will you have an account balance that can handle the increase in margins that comes with heightened volatility?

Until next time, I hope everyone is enjoying the warm weather.

Learn to Trade Now