Volatility......Impact on Trend Trading

Volatility seemingly is creeping back into the markets after going AWOL for a few years. Volatility tends to correlate with bear markets, although it hasn't really been a factor since 2003, partly you could argue because there has been a *Bull bounce* or that the nature of rangebound markets are conducive to low volatility.

Volatility tends to make for very choppy markets. Stoplosses therefore are triggered more frequently, trends are interrupted, and trading becomes from a timing perspective increasingly difficult.

By March 2003, the VIX stood at 30.6.

That turned out to be the high point for this cycle. In March 2004, the VIX averaged a reading of 17.7. By March 2005, the average was just 13.1.

The first four months of 2006 saw VIX readings as low as 10.74. For the year through May 10, the beginning of the current sell-off, the VIX averaged just 12. Investors had become accustomed to low volatility, and fear had dropped to levels even lower than in the run-up to the 2000 bubble.

Instead, we're headed back to normal times when stock markets and stock prices fluctuate with something like their average volatility. Given the recent abnormally low level of volatility, a return to normal is going to hit some investors hard. Abnormally low levels of volatility have led some professional investors to load up on debt in order to pursue risky investments.

The classic example currently being the Yen carry trades, that have added fuel to the housing run up, and arguably the speculation in commodities.
With the Yen trade fast approaching the end, does the increase in volatility signal the end of nice easy trend trades?

jog on
d998

I reckon so

Most of the latest batch of traders are going to get a rude awakening.

Those that have been around a bit will adapt.

...and right on cue, european indices are glowing an ominous red hue

FTSE -82
DAX -70
CAC -60

US futures at the red end of the spectrum also.

Wave C begins... or is it a Wave 3?

wayneL said:

...and right on cue, european indices are glowing an ominous red hue

FTSE -82
DAX -70
CAC -60

US futures at the red end of the spectrum also.

Wave C begins... or is it a Wave 3?

Click to expand...

Good

I am now a bear so down, down and further down please.

:chainsaw:

Hmm did some selling today copped a loss after holding for 2 days longer hopping(and succeeding) to claw some back-- didnt want to risk a 3rd day.

Anyway I agree with Duc on this one Volitility can be seen in most ends of great trends.

wayneL said:

I reckon so

Most of the latest batch of traders are going to get a rude awakening.

Those that have been around a bit will adapt.

Click to expand...

I think unfortunately you are correct there Waynel.It has been far too easy making good profits since I've been around (less than 3 years).

Trend trading has been the in thing because of the lack of volatility as has been mentioned.So maybe divergence signals now, but then same thing, you will get stopped out a lot especially if you trade low risk set ups with tight stops.

I am almost too scared to trade at the moment, just the odd one here and there but not doing well, awaiting for some direction from somewhere, anywhere.

Porper
Out of the market is a position.
I only have one open position other than those in longterm systems.
DLS.
So far the longterm methods have copped a 10% peak to valley drawdown across the board (Of the 3 I trade all around the same).But still well within the maximum seen in systems tests.

Speculation has changed I feel to Roulette---Russian.

Porper said:

Good

I am now a bear so down, down and further down please.

:chainsaw:

Click to expand...

Bears have more fun

tech/a said:

Porper
Out of the market is a position.
I only have one open position other than those in longterm systems.
DLS.
So far the longterm methods have copped a 10% peak to valley drawdown across the board (Of the 3 I trade all around the same).But still well within the maximum seen in systems tests.

Speculation has changed I feel to Roulette---Russian.

Click to expand...

I am enjoying being involved with commodity futures and not much involved with stocks at all atm (just short some premium over the indexes and the daily throw of the dice with eminis)

The non corelation with stocks is something I am finding truly pleasurable

Not to say I won't come back to them, but extreme volatility is a byatch to trade... russian roulette for sure :

et al

Volatility makes it far more difficult for speculation, which ever side of the market that you are on. Volatility, also referred to as beta provides greater movement, and faster movement, in both directions.

Therefore, all technically based trading that utilizes beta as the measurement of RISK will need to be readjusted to take into account the new (or return to the old) market conditions.

For those newer "traders" who have experienced only the last three years of an ASX, have you "tested" your methodologies within the more volatile environment? If so what have you found?

As regards correlation twixt stocks & commodities, sure, a MSFT will not correlate necessarily to wheat, but Miners, can correlate to commodities that they produce, as their stock price = reserves - depreciation + price received (as a quick calculation)

The US is, and has been in a secular bear market since 2000. This bear is a rangebound bear, and may well increase the violence of the swings from top of the range, to the bottom of the range, on the DJIA, this will be circa 12000 at the top, to circa 7000 at the bottom.

The higher the volatility, the more profitable trading potentially becomes, with the caveat, that of course you need to be right.

jog on
d998

I dont care where it moves (as long as it moves!) so volatility will become my new friend.

Ageo

Which therefore begs the question, with increased volatility, do you; adjust timeframes, trade management, methodology, or "other"?

jog on
d998