If you are an active trader you’ve probably frustratingly grunted “there’s no volatility” at some point in recent years. Now, that has clearly changed in the past month with the VXX spiking above 30 as recent as a week ago. We haven’t seen that level of volatility since the turn of the new year.
As traders we are all a bit excited or let me rather say motivated by it. More volatility usually leads to more trading opportunities and larger short-term moves that we can quickly profit from.
Now, here’s the hard part, adjusting properly. The bottom line is we want to take advantage of trading environments like this. However, that doesn’t mean trade bigger and faster. What it actually means is the same thing any trading environment means. Stick to your trading game plan. You will make more money that way!
How, you ask?
Simple. With bigger and faster moves your same trading setups should yield you larger returns. You don’t need to do anything different. Recognize your support and resistance levels and only enter when the risk/reward ratios make sense. What you may find is ratios that work but the actual price amount of the targets is larger with the increased volatility.
Also, be sure to recognize the momentum on a given day in this type of trading environment. For instance, if the market on a whole is higher than it’s opening price and higher than the previous day’s close, well then things are likely strong that day. If it’s the opposite, well, then things are probably weak.
With this information, we as traders, can look to hold onto a piece of our positions to that next price target when we see this relative strength and weakness. Since there is higher volatility then there is a higher likely hood that we can get an aggressive move that extends.
Please note that this works both ways. Higher stock trading volatility means just that. So be sure to stick to your stops because big fast moves also mean big fast reversals.
Do not be like some traders I know in recent weeks who were up several thousand each day and gave it all back. The first three trading days of this month took away any trader’s profits who tried to hang on the entire day, even when it was clear the rally or decline has lost it’s steam.
Stop Loss, Stop Loss, Stop, Loss…and if I didn’t mention Stop Loss!
For clear direction on where to place your stop loss orders and how to manage your risk check out the Active Trading Blueprint.
Regardless of what market environment we are in;
Remember, “Victory Loves Preparation”