Best Ways to Maximize Increased Market Volatility

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Introduction to Options Trading Strategies, a new COMPLIMENTARY guide from RJO Futures, can help you get started. Featuring easy-to-understand explanations, concise examples and sample charts for basic options strategies, it's a must have tool for any level of trader.

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As an individual speculating for your own gain, or a small businessman hedging your commodity needs, or even a professional advising others, you could have already spent many, many years trading futures and still never have lived through an economic environment like the one we're currently experiencing.

Does that mean you should change your trading strategy?

Answering that question means examining the basic tenets of the way you analyze a market; the way you determine the entry and exit points for a trade. And while we can't use this forum to speak to your personal tactics (you'll want to speak to your advisor or trading coach); we can take a look at some broader rules -- standards you might say -- under the light of today's market.

Having a plan

It's such a basic concept; it seems unconscionable that a trader would enter any market without a risk profile (target gain/loss) of the trade. Today's market moves only make this rule more important.

Today's bearish economy can also change the risk profile of a previously successful plan. A simple example is the classic "buy and hold" mantra or believing in the long-term increase of asset prices: what's the holding risk given the potential for deflation? Or you might ask does your plan include a hedging option to cap price moves?

The rapidity of price moves can also have an impact on a trading plan or the simple rules that constitute a plan. Consider the old standard: "the trend is your friend". There were strong trends to follow in Q4 2008, but the speed with which they extended or reversed startled traders. The rule still worked, but required greater diligence and attention. (Note: futures markets' parity in terms of taking long or short positions make them ideally suited for following market trends in either direction.)

Riding losers in volatile times

Trading is admitting you're wrong: over and over again. Keeping losses tight is what preserves cash for profitable trades. The habit of holding onto losers in hopes that the market will bail you out never really works, but current market conditions can make it even more deadly to an account's valuation. Volatility, like speed, kills.

However, unlike speed, volatility generates potential profit. Rapid price movement is what makes short-term trading worth considering. When the moves become more extreme, that's not necessarily a signal to buy or to sell or to sit on the sidelines. It is a signal to be extremely cognizant of the risk and to manage that risk by proactively trading smaller positions. You should know the risk of the position relative to your account value and your account value relative to your total portfolio. The increased risk and volatility in the market today are not inherently bad for a trader, but they are inherently demanding.

Is Fibonacci depressed?

We imagine that back in the 13th century when Leonardo was practicing mathematics there was occasionally some type of market turmoil (e.g. a corner in goat milk?). We don't know the impact on his renowned discoveries such as the golden ratio, but their application to the markets is technical in nature, not fundamental. So whether you're analyzing markets by following an established trading guru or your own homegrown algorithm, macro economic factors set the context, not the pattern. Technical analysis is about patterns; patterns that appear in bull and bear markets; patterns that appear during economic bubbles and recessions.

Pricing patterns, volatility, risk, macro/micro economic conditions, etc. all change throughout a trader's life. Understanding the interplay of these factors; understanding their impact -- if any -- on your approach to trading will improve your strategy and, ideally, your trading profits. Invest the time to review on your own, or work with a trusted advisor.

With over 20 years in financial services, Mr. Szczech has worked with both institutional and retail clients in diverse roles such as managing director at the NYSE and as president of the Client Group at TD Ameritrade. He is currently the CEO of RJO Futures, the private client division of R.J. O'Brien & Associates LLC, in Chicago.

Ready to Learn About Options Strategies?

Introduction to Options Trading Strategies, a new COMPLIMENTARY guide from RJO Futures, can help you get started. Featuring easy-to-understand explanations, concise examples and sample charts for basic options strategies, it's a must have tool for any level of trader.

Sign Up for Yours Today!