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  1. #1
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    Trading with the volatility

    Hi traders.

    Today I’m going to share with you one simple concept that can help you get profit in the market that you don’t understand. What I mean is that sometimes markets don’t show any signs of directional supply and demand. They go back and forth, sometimes you see that something is happening (some momentum is developing), you expect it to continue, but more often than not price suddenly drops beyond all supposed support levels.

    Just a look at the chart below - can you say that you have a predictable price action here?

    Attachment 11882

    No indicators can help you decypher this action as well. Such market condition can be best described as unpredictable and volatile.

    But is it really impossible to succesfully trade in such market having limited risks at the same time? Every professional trader is aware of risk he is going to take, whilst amateur traders can trade without stops. In other words - can we have reliable and reasonable stop in such market?

    Yes, we can. But in our trading we have to rely not on price action itself (it can be confusing) but on volatility. Look at the screenshot of ATR indicator below. This indicator measures volatility. You see that volatility cyclically moves in sort of a horizontal channel:

    Attachment 11883

    The key here is that when you have period of reduced volaility, it is often followed by growth of volatility pretty quickly - it is very uncommon for the market to stay in a phase of reduced volatility for a long period of time. But how can we benefit from that? We don’t have any volaitility index to trade.

    Yes, but nethertheless we can benefit from such behavior of volatility. First of all, small parameter of volatility means that our stop loss can be also small. Secondly, small volatility often occurs when we have very tight trading ranges like this:

    Attachment 11884

    Guess what happens when price emerges from such trading range? Right, this is volaility break. Price breaks out from this range and makes significant directional move, more than 30 pips. We don’t know the direction of further breakout, yet we know that possibly this breakout will lead to directional move. The more time it takes to form trading range with low volatiliy, the more rapid breakout will follow:

    Attachment 11885

    So, you can just place buy stop or sell stop orders to get on this move, having very small stops at the same time. Breakouts can be false, yet you lose a few, and earn much more. The key principle here is to cut your losses quickly and never “nurse” bad trades (this is universal principle of momentum trading)

    For example, such type trade could be described this way:

    1. You see extended trading range with reduced volatility;
    2. You place sell stop order to enter a position on a breakout from this range;
    3. You don’t move your stop until price retests previous level and ensures that there are no more stong buyers in this market;
    4. You enjoy freefall of price and prepare to take your profits.


    Attachment 11886

    But of course, you have to be aware of overtrading and be very patient in a process of trade selection. If you do everything right, you can have nice profits trading along with volatility, even if you don’t have any ideas of destination. If fact, when markets are trading in a trading range (they are supposed to trade there 80% of the whole time), nobody can really predict destination of price, so trading with the volaility can be a good option.

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    Last edited by Value trader; 12-17-2014 at 11:04 PM.

  2. #11
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    Quote Originally Posted by cozard007 View Post
    When it comes to the trading of volatility in the market, the issue varies, it is very good to know that volatility is just an activeness in the market, and if the activeness is much, it might lead to whipsaw and other bad market conditions. It might only be good if the market is seriously trending or reversing at any given time.
    Mate we can use high market condition to do trade only in Trending or reversing market. That's a better idea, I always wait for good strong support and resistance zones to enter in forex, and these good points can be seen only above or lower areas in the market, Better to use these zones for buying and selling, I love Gbp Aud pair

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  3. #12
    Trader techboy's Avatar
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    Due to high volatility of the market it is most of the time a trader become tentative in his actions, sometime he follows his strategy now but ignore the next day or maybe shift to another strategy the next week, we often get frustrated when the market does not move according to our expectations, but for a trader to succeed in this market he should not adjust to the market, he must set his own rules and enters only when the market align according to it, this is my way of avoiding market volatility, "let the market come to you" not me that will adjust the market.

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  4. #13
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    Quote Originally Posted by techboy View Post
    Due to high volatility of the market it is most of the time a trader become tentative in his actions, sometime he follows his strategy now but ignore the next day or maybe shift to another strategy the next week, we often get frustrated when the market does not move according to our expectations, but for a trader to succeed in this market he should not adjust to the market, he must set his own rules and enters only when the market align according to it, this is my way of avoiding market volatility, "let the market come to you" not me that will adjust the market.
    I understand all what you have said sir, but I am sure that no trader has defense in not being doing what is right in the market. There are mainly rules of trading, and the main thing that would help the trader to looks carefully into the pattern and condition of the market is patience. Traders need careful studies of the condition of the market before any decision.

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  5. #14
    Trader techboy's Avatar
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    Quote Originally Posted by cozard007 View Post
    I understand all what you have said sir, but I am sure that no trader has defense in not being doing what is right in the market. There are mainly rules of trading, and the main thing that would help the trader to looks carefully into the pattern and condition of the market is patience. Traders need careful studies of the condition of the market before any decision.
    Being patient can be subjected, how patient a trader must wait? 1 hour, 1 day or 1 week, traders can be impatient at times and will have really difficult way of controlling his desire to open a trade so for me I think discretionary trading which is to analyze the market from time to time wont create good results in my case because am kind of an impatient trader.

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  6. #15
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    Trading in volatility and range is really very interesting. And it is really very good for scalper too. I actually love to trade in such condition when a currency pair oscillate in a small range of 20-30 pips. And I have made much of my profit when a pair is ranging. One thing is really true that when pair breaks this range it move very violently. So better if we don't take too much risk when trading in volatility and in a ranging market.

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  7. #16
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    Atually we may find that the trading with the volatiltiy is a vry good and reasonable way for the tarding but also we may find to understand the real amout of volatility found really on the market . i think that there is a very good way to make a best use of that indicator and I seek for it always

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  8. #17
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    Quote Originally Posted by Hukam View Post
    Mate we can use high market condition to do trade only in Trending or reversing market. That's a better idea, I always wait for good strong support and resistance zones to enter in forex, and these good points can be seen only above or lower areas in the market, Better to use these zones for buying and selling, I love Gbp Aud pair
    I doubt it if we can trade reversal when the market is extremely volatile, this might not be good because it means such trader might be guessing at that time.GBPAUD is a pair i am working with too, it is very volatile, and it is better to trade the trend on this, i know that traders get to be lucky with its reversal at times, this is not what i want in my trading.

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  9. #18
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    Quote Originally Posted by silverlady View Post
    I doubt it if we can trade reversal when the market is extremely volatile, this might not be good because it means such trader might be guessing at that time.GBPAUD is a pair i am working with too, it is very volatile, and it is better to trade the trend on this, i know that traders get to be lucky with its reversal at times, this is not what i want in my trading.
    yes, I trade with the trend, but I also have a reversal of the trend analysis, I also observed the price correction, like today. after the price goes down in a large range, due to the effect of the NFP on Friday. Monday correction price rises, we can get a profit of 50 pips from the price correction. we try to understand the character of the market

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  10. #19
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    Quote Originally Posted by silverlady View Post
    I doubt it if we can trade reversal when the market is extremely volatile, this might not be good because it means such trader might be guessing at that time.GBPAUD is a pair i am working with too, it is very volatile, and it is better to trade the trend on this, i know that traders get to be lucky with its reversal at times, this is not what i want in my trading.
    If market is too volatile it might not be a good time to trade because it can chopped our trade easily, especially if we are using small stop loss, if we are not placing stop loss level then maybe we can get some profits if we are quick in cutting our winning trades while the the price is still in a volatile condition, but such approach is a dangerous way to trade.

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  11. #20
    Trader Hukam's Avatar
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    Quote Originally Posted by techboy View Post
    If market is too volatile it might not be a good time to trade because it can chopped our trade easily, especially if we are using small stop loss, if we are not placing stop loss level then maybe we can get some profits if we are quick in cutting our winning trades while the the price is still in a volatile condition, but such approach is a dangerous way to trade.
    Well mate if market is volatile that mean is not that its very dangerous for us depend upon your risk and reward. And we don't have to forget about our risk and money management. Depend upon your entry point too some time a good high volatile market can give you a big amount of profit too. I like high volatile pairs very much

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