Understand Volatility

Today, I just wanted to speak to you all about the volatility of the markets and to explain more about it. I do get members emailing me who constantly sit and watch their IG Index account all day, and this is never an approach I recommend. Personally for me, I enter the trades on Monday morning, and I never look at the performance until the following week unless I get questions asked about the performance.

For roughly the last 12 – 18 months the markets have been in a period of very high volatility. Many markets are currently trading at around twice their historical mean (some more and some less, but double is a rough guide). The usual measure of volatility is the range that a market makes on any particular day. There is a specific formula for this calculation which we won’t go into here, but the most frequently used measure is known as ATR (average true range).

If we look at ATR over 2 years ago (from the same week in January 2007) to today for different sectors you will see what I mean. I have taken 1 market from 5 major sectors. The numbers below show the amount of points that each market moves on average on a daily basis. The first column represents 2007 and the second column represents 2009.

Wall Street              98          286

Euro/USD               90           280

Gold                       10           22

Cocoa                    32           116

Crude Oil               179          253

What this means as far as our trading is concerned is that we can expect approximately twice the volatility in each market on a daily basis, so consequently when a market starts to break out from a range and a trend develop it’s not going to go up or down in a straight line (markets don’t anyway) but is going to move around a lot. Therefore, we may enter a trade and it go against us for a few days of even a week or so and then at some point turn around and start going in the right direction again.

This volatility is tough to handle from an emotional perspective as it’s like riding a rollercoaster. The thing is that what we have to do is try to ignore these fluctuations in the market and keep on taking the trades. Most of what is going on a day to day basis is just noise and is best to be ignored.

We never know in advance when the losing periods or the winning periods will be (if we did trading would be exceptionally easy and everyone would do it as we would only trade the winning periods and stop trading through the losing periods) which is why we just follow the system. We know without doubt that the system works so all we do is follow it and wait for the winning periods to come, which they will.

This is the life of the trader. It is now and always will be like that. If you can accept these losing periods as part of the trading game and keep following the system through thick and thin you will do well in the long run. If you can’t accept these losing periods then you will never be successful as a trader as this is how it will always be.

The successful ones in trading are those who accept there will be losses as well as gains, and who look at the overall picture. You have to be patient and accept the losses, and wait for the really big winners, because when we win, we win big.

Kind Regards,

Robert Stewart