Info!! Lessons Inwards Trading Too Psychology - 4: Volatility

When nosotros sympathise what is going on inward the market, it gives us a psychological feel of clarity in addition to control.  Much of our worst, reactive trading occurs when nosotros experience out of control.  Looking closely at how the marketplace is moving tin render us amongst understanding--and that tin hold upwardly tremendously helpful non entirely to our trading, merely also to our trading psychology.

In hearing from many traders recently, I'm finding that they are having a hard fourth dimension adapting to the market's shifting volatility.  With volatility declining--and the volatility of volatility waning--we larn choppier marketplace conditions.  With volatility expanding--and greater vol of vol--we encounter momentum moves.  Many times, traders are zigging when they should hold upwardly zagging because they are misreading--or *not* reading--market volatility.

Above is a tool I created inward almost forty minutes from historical information via the e-Signal platform.  Here we're looking at the volatility (high/low range) inward each v infinitesimal bar inward SPY relative to the average attain for that same fourth dimension bar over the prior v trading sessions.  So, for example, we're seeing how today's 9:30 - 9:35 AM EST bar compares inward size to the average 9:30 - 9:35 AM EST bar for the prior v trading sessions.

Note how, from the really root of trading yesterday, nosotros were seeing relative ratios below 1.0.  That agency we're getting less motility inward each fourth dimension catamenia than we've seen over the by calendar week of trading.  Very speedily that tin alarm you lot to the fact that this is non probable to hold upwardly a high momentum market.  In the lower volatility environment, moves are less probable to extend in addition to nosotros desire to hold upwardly to a greater extent than selective almost taking trades in addition to opportunistic almost taking profits.

Note also how it would hold upwardly slowly to practise this relative volatility mensurate for whatever stock or index you're following.  We typically await closely at cost movements in addition to trends; we're less probable to test how volatility is trending.  Adapting our trading to the marketplace surroundings allows us to recognize when nosotros should hold upwardly trading moves in addition to when nosotros should hold upwardly fading them.  That tin eliminate a helluva lot of frustration!

Further Reading:

Trading With Relative Volume

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