E-mini Trading: Does Market Volatility Unnerve Your Day Trading?

By Author: David Adams
Total Articles: 41
Comment this article

The last week provided a significant increase in market volatility. Anytime you, as an e-mini trader, notice a rapid change in market conditions it requires a bit of rethinking about the way you intend to trade in the new trading environment. If you are locked into a systematic trading mindset, you may find that a trading methodology that was working well in a previous market condition will be less-than-effective in the new trading paradigm.

Markets become volatile, generally speaking, because of uneven distribution of capital; in simpler terms, the amount of by volume versus the amount of selling value are out of equilibrium.

What is the end result of volume irregularities?

The market loses its equilibrium and prices will move in an irregular and erratic manner until a new equilibrium is discovered. This process is ongoing and can take a variable amount of time until the market achieves equilibrium. Of course, market volatility has a direct impact on how we, as traders, approach e-mini trading. Since a market that is out of equilibrium presents unique challenges, many of which were not present in a ...
... stable prior market phase, e-mini trader must consider several changes in applying his or her trading methodology.

Notice that I did not say that e-mini trailers need to adopt a “new” trading methodology. No, I prefer to make subtle changes in my own technique to accommodate the new trading environment. Here are some ideas that you may find useful in considering your trading and volatile markets:

• I tend to look for e-mini contracts that are less affected by market volatility than the e-mini contracts I was trading prior to the onset of the volatility. For example, I enjoy trading the YM contract and the NQ, but have found some calmer waters to trade in the early hours on the 6E and 6A contracts.
• You may want to consider widening your stops. I often use the Average True Range (ATR) as a barometer of market volatility, and know that for my trading I must have a stop loss that will cover at least the current Average True Range. Obviously, with an ATR of 50, any sane trader would have to seriously consider his or her account size and appetite for risk. Personally, the scalper style of trading is not particularly conducive to trade exponentially high ATR's.
• When the market is particularly volatile, I tend to abandon my trades at the open. In most markets, especially nonvolatile markets, I usually start the day with a move on one of the directional legs of the opening range. In volatile markets, I have abandoned that strategy has I am less clear on understanding volatile market movement.

There are those who decide that a volatile market is not tradable, and I suppose I have little argument with that line of thinking; on the other hand, there are some tremendous trades to be had on days when the market is moving in a wide range.

In summary, I have commented on some considerations for trading and volatile market conditions. It's important to realize that a volatile market will have an effect on your trading style and trading profits. Good traders make changes to their trading methodology to accommodate a higher level of market volatility. I also cautioned against adopting a completely new trading methodology as opposed to modifying your current trading technique to fit current market conditions.

Real Live Trading Doesn't Lie. Spend 3 days with me, in my trading room, and see if you are one of the many that can profit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.