And Deciding Whether To Trade ThemAs a follow up to my trading at lunch(or not) article, I thought I’d discuss trading generally over periods of abnormal activity. This should include periods of both higher and lower volatility. Anything which might affect either the risk/reward of a strategy or the psychology of a trader, should be taken into account.
First things first, we need to define abnormal activity or volatility. Some traders like to look at the VIX for example if they trade index futures. However, I prefer to look at metrics based on the actual products I trade themselves. Looking at simple stats such as average daily volume and range, we can get a pretty decent idea and even more so if we monitor these by 30min time periods. There are various ways to look at conditions, so decide on one and then monitor it.
Once we have defined what unusual trading conditions might look like, we have to decide whether or not we should trade them and if we do trade them, do we use the same strategies with different risk parameters, or strategies tailored to the specific activity. Clearly the answers to these questions will be strategy, account and personality dependent. Whatever we chose, if the conditions have been visualized and rules set up to trade these different conditions then when they do appear, we are far less likely to deviate from our plan.
The thing is that many traders don’t have any plan at all for when things change. This is the problem. They might think “If markets start to speed up, I’ll smack them and make a ton of cash” or “I won’t trade if things get really volatile” or “If it’s really slow I’ll just leave it and finish for the day early.” Is this enough though? No, not in my opinion. I see people getting sucked into different trading conditions without a plan all the time.
There are traders who don’t recognize that conditions have changed quickly enough and there are traders who can’t resist trading less than ideal conditions. If we trade in a market which is exhibiting particularly slow conditions, the chances are that the swings will be fewer in number, the volume will be lower and ranges will be smaller. This means fewer opportunities to enter or exit a trade and holding a trade for longer. No matter what the experience level of a trader is, being in trades for much longer than usual will start to bear down on a trader psychologically. When trading in times of high volatility with exactly the same strategies, it often means being exposed to higher risk for the potential rewards. The trading adage of “snatching at winners and holding losers” really hurts here.
So define activity, create rules to manage unusual definitions of activity and monitor the markets for signs of markets shifting gears. Trading is not rocket science, but it must be carefully considered from all aspects. Mistakes can cost dearly.
Trade well.
