Trading Volatility: How To Shift Gears

Price Ladder Volatility
Trading volatility

One of the core skills built into every consistently profitable trader is having the ability to deploy different trading strategies that are fit for purpose when trading volatility in different environments. Roger Federer does not play his attacking grass court game on a clay court nor does a cricket bowler bowl short balls on a slow flat pitch in the sub-continent. Assessing your conditions and terrain more quickly than your opponent in any high performance pursuit, will result in your performing better due to classical adaptive principles. Once the landscape has been determined, then one can deploy the optimal approach to profit from the sequence of events that may unravel.

Trading strategy versatility in different conditions with approaches that have high positive skew will ensure that consistency in returns will prevail. This is why I always try to instill into our new traders that are learning to become a trader that survival is the most critical part of their development in the first 2 years whilst they learn to trade so they can be exposed to all the volatility seasons of the market. Only when you bear witness to the different seasons of the market with a strong continuous development approach and questioning framework can you start to harvest the patterns and strategies that are effective in specific trading conditions. An important note: unless you have a rigorous yet dynamic learning approach you will not  be able to discover your strategies that are best fit for the conditions you are faced with at a point in time. The cycles of the market ebb and flow between compressed volatility and extreme excess volatility, and within that spectrum you need to be able to deploy different trading ammunition into the market that hits the sweet spot of performance at every turn in volatility.

Trading Volatility During Covid-19

During the first 2 weeks of March 2020 you would just need to look at the extreme levels of volatility on the VIX Index to understand that the environment was in panic mode. During panic mode certain conditions prevail that make a variety of strategies much more effective and certain order flow dynamics on the price ladder become much more obvious than during slow market conditions such as large panic orders that appear on the book that result in many type of front running strategies which we train on the price ladder course. During the first 2 weeks of March your ability to operate between 4th and 6th gear was constant, and momentum break-out strategies or fast exhaustion fade strategies were the most effective plays in the market. Also another momentum strategy that was being executed on our trading floor was the Hit and Run which we explore in great detail in our price ladder course.

Volatility Contraction

However, fast forward just three weeks later and these strategies that were so successful during the beginning parts of March would be net losers if approached in the same manner. Conditions had shifted sharply after the market absorbed all the global fiscal and monetary stimulus and VIX index collapsed from 80 to sub 45. Our experienced traders became less cavalier in the market and shifted back to a stalking mindset whilst staying in 1st gear most of the day and only when a confluence of factors set up they could then shift to 5th gear when the right trade situation manifested. In early March, having strong news awareness coupled with deep understanding of accelerated order flow dynamics were the right ingredients in such a market to be profitable.

Day Trading the E-mini S&P 500

How To Develop Volatility Trade Strategies

As a practice to start understanding which of and when your strategies work best in a broader market context with using market volatility as your determining measure, you can use the following PROCESS approaches:

#1. Average True Range

Use a simple volatility measure such as ATR (Average True Range) or average volume in a specific time frame and overlay that when you are testing the success of your momentum strategies as an example. If the volatility measure is high over the chosen period and the pattern you are observing shows strong success, then you are onto a strong measurement for your pattern in play.

#2. Order Flow Mapping When Trading Volatility

Map the order flow dynamics on the price ladder, which we discuss in our order flow course, that made this trade work and build it into process 1.

#3. Technical Landscape

Review the technical landscape that led to that pattern being successful or not successful and build that into your conceptual framework of process 1 & 2.

3 Trading Principles for Volatility

Watch one of our senior traders discuss 3 key approaches and tactics to trading in volatile market environments.

To learn more about how our team approach the markets and develop a framework of trading approaches and strategies then join our 8 week career program where all our desk traders have graduated.

To find out more information about AXIA Futures then visit our home page here.

Continued development

The above can be your first simple approach to building an understanding of which of your strategies work in certain volatility conditions.

I wish you all continuous accelerated development and remember that the markets reward those who have a deep curiosity in how they learn, assimilate and distill their patterns.

What do you think?

Written by Alex Haywood

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