Trading In Volatile Markets

KNOW THYSELF; DO NOT WHAT YOU CAN'T
Trading in volatile markets provides extraordinary opportunities but it also carries more risk. For more aggressive traders, volatile markets can lead to larger than normal losses, but they can also provide rare opportunities that can be highly advantageous for your trading account. If you are going to trade in volatile markets, or if you have positions and the markets become volatile, you need to know how to recognize the warning signs and navigate through the storm. You have to be able to manage risk if you want to take advantage of substantial price moves.

If you are trading a volatile bull or bear market, you need to use the possible daily trading ranges as a guideline for capital. Exchanges and clearing firms are slow to act. They are rarely ahead of the curve on margin issues, and they are usually caught off guard and have to increase margins after the damage is done.

By understanding that you need more capital on hand to trade volatile margins, you will have more staying power than the average trader. The trader using margin as a guideline will not be able to stay in the position. A trader who understands that volatile markets can have higher trading ranges than the exchange margin should be able to ride out the storm better.

TAKE NOTHING FOR GRANTED
When the markets become volatile, it doesn't mean you have to stop trading. Your opinion of the markets can still be correct but outside factors may be an issue. For example, the US Dollar, European nations needing bailouts, wars in the Middle East, the natural disaster in Japan, can all affect the markets. In my opinion, what you need to do is take on less risk during these times. The only way to really achieve this is to de-leverage. The best way to do this is to reduce your position size so you can stay in the game.

When the markets become volatile, traders need to have more capital for their positions. Greater daily trading ranges means traders should have more capital per position. If the trader does not have the capital for the increased volatility, they need to de-leverage. One way to de-leverage is to either reduce position size or trade mini contracts instead of standard contracts.

Another way to de-leverage is to use futures spreads. Traders caught in a volatile market can use futures spreads to potentially reduce the risk in their position. They can leg out of the spread into their original position after the smoke has cleared. Finally, traders can also reduce risk and de-leverage by using options with their futures position or just use option spreads, like a bull call spread or a bear put spread.

IN A NUTSHELL
All in all, the most important thing to take away is that when the markets are volatile, traders need to reduce their risk exposure. While volatility may provide extraordinary profit potential, it also may lead to greater than normal risk. Traders need to manage this risk while still being able to take advantage of price movements in the market. By reducing their risk exposure, traders will be able to stay in the game and have the opportunity to go after substantial price moves.

HAPPY TRADING