Navigating These Volatile Markets

Today’s article is submitted by Michael Toma.  

Michael is a Certified Risk Manager, author, and trader and has graciously joined The Trading Edge ( team to be our “resident risk expert”.  

If you have any questions on risk management, drop Michael a comment below.

The new year brings lots of trader resolutions. Maybe it is a commitment to being more disciplined or to better use your technical tools at entry and exit points. All great; until the market volatility and daily ranges triple. So what can traders do to keep themselves safe yet engaged during these turbulent times.  

One of my biggest concerns as a risk professional is the temptation effect that most traders are challenged with.

Let’s face it; more volatility comes with greater opportunities.

Who needs to take two points on the S&P futures when we can now grab 10….woo hoo! Wild swings also come with quick price bursts and for those with smaller accounts or who uses tight stops, this can result in a reduced trading edge.

Here are a few ideas to keep you safe in these turbulent waters;

  1. Reduce size. There’s really no need to keep trading share or contract sizes at levels normally traded during slower markets. You can rack up some nice points even with a few ES futures contracts, for example.
  1. Adjust your targets. I love volatile markets. Volatility ultimately gives me the opportunity to make a living. The markets however being the beast that it is also brings an increased level of trade and account risk to accompany such opportunity. To overcome that exposure, it’s important to extend your targets. The market is providing you with a gift in the form of increased trading ranges and by keeping targets normally reserved for tighter markets, you are bypassing an environment which traders should embrace, not fear. At a reduced size, you can also consider increasing your stop-loss a bit to compensate for the volatility as well. Remember, these winning trades will need to pay for the losing ones; so don’t cut yourself short.
  1. Maintain a project-like approach to trading.  When performing trade journal audits, I monitor how a trader alters their trading style during an increase in volatility. Newer traders are particularly attracted to the lights and these markets produce a lot of flashing platforms; even in the overnight futures sessions. I’m always encouraging trade plan compliance and it’s even more critical now to adhere to your plan. You’ve made a commitment to your plan, rules, filters and core risk principles; so stick with them.
  1.  Chill!  The best trade is often no trade. This is rough territory for new traders. Heck, I’ve been doing this for quite some time and my heart still beats a bit faster when I’m in a fast moving market. Take this opportunity to back-test your strategies to see if they work well in a volatile environment. You might be pleasantly surprised and can enter the waters with more confidence. It may also trigger some additional filters that may suggest you stay away. For example, you may wish to stay put when the 5-day average S&P point range is greater than 30 points or limit trading to only when price is within a market profile ‘value area’ zone.

Personally, I love these markets!

This profession is based on opportunity and few can argue about the markets not giving you several chances throughout the regular and after-hours sessions.

I take a heightened disciplined approach to executing my plan and will penalize myself if I deviate from it; even if it results in a winning trade. Stick with your plan, consider these adjustments within your plan rules to reduce volatility risk and never be afraid to sit on the sidelines until the storm passes.

If you can take a risk-based approach to this profession and execute accordingly, you are on your way to bringing your game to the next level.


Michael Toma, CRM, is the author of The Risk of Trading: Mastering the Most Important Element of Financial Speculation, in which he details his risk-based approach to long-term success in trading. His unique ‘focus on the risk’ approach using data-driven risk analytics has attracted fund and individual trading professionals seeking improvement in their trading performance as well as new traders seeking a consistent and transparent approach to the markets. Mr. Toma received the Certified Risk Manager (CRM) designation for risk management excellence from the National Alliance in 2007. In addition to his role as an enterprise risk consultant, he actively trades the equity and bond index futures markets.


Navigating These Volatile Markets

by editor time to read: 3 min
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