How to Navigate Trading Volatility Spikes
|Over the last 20 years, it seems that about every six to eight years the financial markets experience severe bouts of turbulence. These episodes of trading volatility, in my estimation, are probably going to become even more frequent as the global economy becomes more intertwined and information is disseminated at light speed.
For the average investor, these spikes in trading volatility can be harrowing as they see their stocks and mutual funds going through wild fluctuations while prices go mostly lower. The average trader also finds this type of environment challenging because the rate of change can be so dramatic that reacting to such price movement usually results in several losses.
In addressing these changes in market volatility, the first question I get asked is if there is a different strategy that should be implemented for such extreme conditions. The simple answer is no. The core strategy of supply and demand never changes regardless of market conditions. The only aspect that changes is the velocity of price movement; and the levels do become a bit wider.
On Monday August 24, the E-mini S&P futures contract was down a whopping 100 points as we were nearing the open of the New York Stock Exchange. Conventional thinking was telling us that it was a crash or just to hang on despite the fact that fear was rampant, and it was difficult not to get caught up in the group thinking. If, however, you have a simple, objective, rules based strategy that you are following, you would have noticed that the ES (E-mini S&P) futures contract was approaching a 240 min demand zone (shown in the chart below). This indicates that there was a high probability that the ES would bounce from there.
Notice I say probability; I always have to address this with potential traders. You must remember that this game is all about measuring odds and that there are never any guarantees. Also, that if it doesn’t hold we take small losses. Lastly, the fact is that nobody knows for sure what will happen next so that’s where a sound, proven strategy comes into play. The reason I bring this up is because many will be asked, “How do you know which level to choose when there are so many I see?” The answer goes back to the specifics in the core strategy we teach here at Online trading Academy. In the next image we can see that the market did indeed bounce from this level. Please understand that there’s no silver bullet here, just a picture that represented true supply and demand.
Because the supply and demand levels do become wider in this environment, the only adjustment to be made for the short-term trader is to reduce their contract size and take entries on smaller time frames.
As I noted earlier, it is unfortunate that so many people suffer in markets with high trading volatility because, quite honestly, they don’t truly understand the dynamics of supply and demand or how the institutions manipulate the markets to suit their needs. The simple fact is, that in order to change one’s results one must change their perception and how they think about trading and investing. Otherwise, the high volatility will continue to wreak havoc in a trader’s psyche and account balance.
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