Trade Safely Amid High Volatility

08/15/2011 8:00 am EST

Focus: STRATEGIES

Pratik Patel

Founder, Clear View Futures and The Futures Room

All traders want volatility, but futures trader Pratik Patel explains that consistent volatility, not wild price swings, is ideal and describes how he adapts his strategy for volatile markets.

Trading can be tough when the market is very volatile, so our guest today is talking about how to manage your emotions and still stay consistent in your trading during those times.

Pratik Patel is here, so Pratik, how do I manage my emotions when it seems like there’s chaos in the markets and volatility is really high?

When volatility is high, one way I like to look at volatility is by looking at the Volatility Index (VIX). It gives me a measure of how much volatility is in there, the volume, the movements in the market, so going into each trading day, knowing that it could be a volatile day. When it looks very volatile, what I like to do is remain patient, remain calm.

One thing traders can do when approaching this volatile market is control themselves. You can’t control the market, so the best thing is to control yourself. Control your emotions and know that it’s a given that markets are volatile, so you have to approach it very patiently, and also, you have to approach it confidently.

One thing I like to do is I wait out the first 30 or 40 minutes of trading, let the volatility do its thing. If there is still continued volatility throughout the day, I will just call it a day. I won’t even trade, and once I’m in a trade, what I’ll do is keep a stop.

A stop is the best way to control the volatility, control that movement in the market, because it’s going to keep you protected no matter what. If the market all of a sudden turns against you, you’re protected. You’re not scrambling to cover, you’re not panicking, and you’re not getting into that over-analysis phase.

You know that you kept your stop at a given point, and if you’re wrong, you’re wrong. The market hits it and you’re done for the day, or done for that trade. Keeping stops is the best way to control your emotions in daytrading.

Now, at the same time, we all want volatility in the market. We need movement, but is it more experienced traders that should really be trading when there’s a tremendous amount of movement way outside of the normal range, or is that a good time to learn too?

Well, the thing about volatility, every trader wants it because it gives you the big movement, but you want consistency. If you’re going to see volatility day in and day out, then it’s going to be consistent, and that’s how you can approach the market with your trading strategy.

NEXT: More Keys to Trading Volatile Markets

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If it’s going to be consistently volatile every single day, that’s what I want to do, but recently, you’re having one day of volatility, the next day dries up. Then next day volatility two days in a row, and the next day it dries up, so you’re getting a lot of chop and a lot of confusion in the market, so you don’t know what to expect.

Sometimes you might have volatility spike in all of a sudden for an hour if some news overseas or something happened with the Federal Reserve or some kind of interest policy, so volatility is very important.

If you want to trade volatile markets, you want to see it consistently happening every single day so you know what to expect coming into the trading day. You can adjust your stops, your entries, and your exits accordingly versus it just being a surprise every single day.

If one market is particularly volatile, say, the oil market or commodities, should I be able to then switch over to just trading equities, which may be a little more calm that day?

Well, you don’t want to keep switching what you’re trading. If you’re very consistent with trading one market; for example, the oil market, if you’ve been trading it for many days, many weeks, many months, and that’s the market you trade, there’s no reason just to abandon ship just because it got volatile.

Wait it out, because volatility is not going to last forever. Volatility will die down, and if volatility is going to be very consistent every single day, then you have to approach it knowing you’re stepping into the trading day and the market’s going to be volatile. You need to either mitigate my risk by putting out less contracts or manage a position a lot better by trailing your stops or using some kind of hedge.

I wouldn’t recommend just abandoning that market just because it’s volatile. Every market’s going to get volatile at times, and I believe that’s just the way markets work. Nothing is going to be steady every single day.

Every market, whether you’re trading pork bellies, you’re trading lean hogs, or you’re trading S&P index futures, there is going to be that spike in volatility. Nobody can avoid it; you’ve just got to adapt to it and go with the flow.

See video: Don’t Let Emotions Get the Best of You

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