September 25, 2018

Trading in volatile markets

After 2-3 years of trading in a low volatility environment, markets have become volatile and this has affected my trading. Suddenly I realise I cannot take a position as risk is too high.

A move which happens in a day then happens in 5 min so what should one do?

The complacency of last 2-3 years has left me unprepared for the current environment and relearning is necessary as what I had learned in the past is sadly forgotten. So much for writing down strategies in a rule book.

Note that I am conditioned for an average trading range of 20 points per hour... now the market can give 40-50 points in 5 minutes!

Here is the chart.... 3 legs each of min 120 points giving a trading range of 360 points. This is huge and is something one gets in a good month!

Same chart with kplswing indicator with N=20... a disaster as every trade gets whipsawed.

Same chart with kplswing indicator with N=3... looks much much better... see the profits... fantastic?

Same chart with kplswing indicator with N=20... BUT using 1 min charts

This certainly looks tradable

So how does one summarise this?

First you must have something which tells you the volatility has increased. This can be captured via ATR (refer top line of every chart). When the ATR increases from 8-10 on 5 min charts to 20+, then either reduce the swing period (N) or shift to a lower timeframe chart (here 1 min).

Note the ATR mentioned above are for NIFTY and will vary for every stock or index.

ATR = Average True Range... google the net for more info. This is available as a built in indicator in all trading softwares/ web charts.

Conversely when the ATR drops below the "norm", then shift to a higher timeframe (eg. when NF trades in a 20-30 points range for 1-2 days then start using 15 min or 30 min charts).

Now this is the immediate solution I could arrive at. I hope to make this simpler and eventually convert this to a system based approach. The important thing for me is to document this change so that it becomes a part of my core trading strategy (or checklist) in the future.

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