Trading in high-vol environments requires a different approach from low-vol markets. Here are 8 strategies to improve your trading and help you to survive in high volatility markets. They are very different from strategies in low volatility environment.
Common Trading Strategies during normal Volatility
When markets are relatively quiet, like in 2017, active traders are normally searching for stocks with either high intra-day volatility or a news catalyst that will put the stock “in-play”. Good traders attempt to exploit this movement and profit from it.
Traders in a low-volatility market such as this, would have a tough time trying to trade a market ETF like SPY or QQQ. There just isn’t enough movement for traders to consistently extract meaningful profits. In a low-vol market these instruments are great for position and swing traders that can sit in a trade for weeks while the markets grind out profits.
The High-Volatility Market Environment poses Problems
When the market volatility regime flips from low-vol to high-vol, many successful active traders find their catalyst-driven strategy does very poorly. Their response is usually one of two things. 1. Keep fighting a losing battle or 2. Step aside and not participate. From my experience, here are the main problems:
- Lack of experience in the high-vol environment.
- Use the Wrong Strategies:
- Wrong Position Sizes.
In a high-vol environment, traders need to “flip the script” in order to be successful. Try these strategies during high volatility.
8 Strategies for high-volatility markets
Times of high-volatility should be times you relish, lick your chops, and get well-paid. Here are a few strategies that have worked for me and other traders I’ve either worked with or observed through the years.
- Migrate from individual stocks to ETF’s:Focus your efforts on the highly liquid ETFs that all the passive funds hold; SPY / QQQ / IWM / Sector ETFs.
- Understand the ETF weightings:
- Sell something.
- Watch for Confirmation:
- Take your Time:
- Shrink your trade -time expectations.
- Trade level-to -level using Technicals.High-volatility markets are technically- driven markets;“If this, then that”
- Reduce position size.
Putting it all together
Snow and a little bit of ice shouldn’t mean you are sequestered indoors, hiding under your bed in a fetal position. Enter the high-volatility environment slowly, with caution, and with your eyes wide open. With preparation and practice there’s no need to be scared. Take it slow. Trade 10 shares of a 3x ETF or 1 contract on SPY, QQQ, or IWM. You might get bitten a few times but you won’t die. Practice trading from level to level, leaning on the technicals to identify probable reversal points. It will go fine. After you build self-confidence you can broaden your horizons and trade size.
If all goes according to Hoyle, after a few high-vol cycles, you’ll be an armed and dangerous killa!