Five Tips For Dealing With This Massive Intra-Day Trading Volatility

The past several trading sessions have been some of the most volatile in history.  

This volatility is a double-edged sword, of course.  There is great opportunity but also great risk.  In other words, it's common to be "right" on the direction of a trade but still lose money due to the massive volatility.

So, what are your options as a day trader?  

Here are a few tips, ranked from most conservative to most aggressive:

1) Stand Aside And Wait For Conditions To Stabilize
This is the most conservative approach.  And, while it can be frustrating at times to see the market moving without you, keep in mind that job number one as a trader is to manage risk.  That applies to your account as a whole as well.  You have to preserve capital and live to fight another day.

If you're relatively new or if your account is relatively small, these can be dangerous conditions and losses can stack up pretty quickly.  

There is no shame in standing aside right now!

2) Reduce Position Size And Widen Stops
This means to trade similarly to your normal strategy, but to do so with a much reduced position size and much wider stops.

Just as a simple example, let's say you normally risk $300 per ES trade.  And, let's say, on average, you risk 6 ticks per trade.  Under normal conditions, you could trade 4 contracts.  In other words, 4 contracts X 6 ticks of risk = 24 total ticks of risk, or $300 worth of risk for the trade.

When things get a bit more volatile, you might have to cut down to 3 contracts at 8 ticks.  It's still 24 total ticks of risk, or $300.

When things get more volatile yet, you might have to cut down to 2 contracts at 12 ticks of risk.  Again, still 24 ticks of total risk, or $300.

And, when things get as volatile as they've been, you would need to cut down to 1 contract at 24 ticks of risk.  Again, still 24 total ticks, still $300 of risk.  

And, honestly, even that might not be enough in some cases recently.  A good rule of thumb is to throw a 30 period ATR indicator on your chart.  Generally speaking, your stop would need to be 1.5 to 2 times the ATR.  So, if the ATR is showing 4 points, your stop would (generally speaking) need to be at least 6 to 8 points.  

You get the idea.  The key is that you simply can't get away with your normal stop in these conditions.  You won't stand a chance.   Know yourself, know your risk tolerance, and adjust accordingly.


3) Reverse Engineer Your Entry
You can also try reducing your risk as much as possible by "reverse engineering" you entry location in accordance with how much risk you want to take.

Let's say you want to get short.  Let's also say your max risk for a trade is $200.  In the ES, that would be 16 ticks (4 points).   Next, figure out exactly where you're "wrong" on the trade.  In other words, that's the price where you need to place your stop.  Now, enter 4 points lower.  It might mean you miss some moves that take off without you.  However, if you're patient and only take trades with this type of "minimum risk" location, you can still find some decent opportunity.


4) Go For The Wild Roller Coaster Ride, But Change Your Strategy
This is the most aggressive approach.  It's basically saying to yourself that these are unique and rare conditions and that you are willing to temporarily throw your normal strategy out the window.

I sort of think of these market conditions like trying to play football in 12 inches of snow or in the middle of a hurricane.  It's going to be tough to execute your normal gameplan, in other words.  You have to adjust.

An example of this type of strategy would be to trade a very small position, with a pretty small stop and just trail it.  For example, let's say you set up a 12 tick stop with a trail.  If you're selective and pretty good at making sense of the market, you're still going to get stopped out most of the time.  But, with price movements and switch as we're seeing now, you can occasionally time it right and catch a 20, 40, 60+ tick runner.  

If you're willing to go on that kind of a roller coaster ride, these would be the conditions in which to give it a go.  

For example, a series of 10 trades might come out like this:
     -12 ticks
     -12 ticks
     -12 ticks
     -8 ticks
     -4 ticks
     -4 ticks
     +4 ticks
     +8 ticks
     +20 ticks
     +50 ticks

In total, you're up 30 ticks.  Is it worth it?  It can be kind of fun.  But, it can also be a grind.  And, with this kind of volatility, even if you're good, it's barely above gambling.  So, if you do this, keep it small. 

***Just to be totally clear...I don't recommend this unless you are experienced and you're fully aware of the risks involved.  It can get away from you quickly if you're not careful, and losses can stack up.

*****Let me repeat:  don't do this unless you know what you're doing and you can withstand a potentially bad day (emotionally or financially).


5) Reminder:  It's OK To Stay Out Of The Market Right Now
Yes, this is a repeat of tip number 1 above, but it bears repeating.  There is no shame in sitting on your hands and waiting for more favorable conditions!

I hope this was helpful.  

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