Login
XMAS SPECIAL: Get 50% Off Life-Time Access to Nial Fuller's Professional Trading Course - Ends DEC 31st - Click Here

By in Forex Trading Blog | 17 Comments

volatility_0A trader may do well for a year, the strategy rocks, then they go through a period where they are not as profitable. They are using the exact same strategy but it falls to pieces the next year, why? This article will help you avoid this trap by explaining why you need to monitor volatility and use changing volatility to adjust the risk / reward on trades by editing your stop distance and profit objective.

This article is designed to put the idea in your head that as volatility changes in the market, the way you look at stops and profit targets should change in accordance with it.

Volatility phases

Markets go through different volatility phases and you need to be aware of that. What this basically means is that a market may currently be going through a period of high volatility where it’s moving a lot each day or week, but that won’t last forever and eventually it will calm back down and the daily and weekly ranges will become smaller. If you do not adjust your risk reward profiles accordingly, you will experience some problems…

If you’ve been doing well for a while but now your targets stop getting hit, maybe you just aren’t adjusting them for changing volatility?

As a market’s volatility or daily price swings change, so should your stop losses and targets. Low volatility can seem like the market’s hardly moving at all, but in reality the only thing that is changing is the volatility, so your stop loss and your profit targets need to change accordingly. In the case of lower volatility, your stops and targets would need to be closer than they are during higher volatility.

If, for example, you normally trade with a 40-dollar target and 20-dollar stop and then your targets stop getting hit and you’re losing more than you should have been losing relative to the risk reward, you didn’t adjust your money management as the volatility shifted. As volatility changes, so to does the potential risk reward on any given trade.

If you didn’t adapt and you lost 20$ at your stop when you should have been losing $15, you are going to be angry. Similarly, if you don’t adjust your profit targets for changing volatility you may miss your target where it could have gotten hit if you had a closer target.

Volatility changes as the market moves a different amount on a month-to-month basis and quarter-to -quarter basis. Look at a year ago vs. now, get a feel for how the volatility compares now to then. Money management should be based around current dynamics and should evolve as those dynamics change. Don’t be trading the same way you were 3 years ago if volatility is now half what it was then.

For example, if the average weekly and daily price range changes by 50%, then it should go without saying your stop losses and targets need to change by about 50% too.

Look at the chart below, you will notice the market shifting from periods of high volatility / big daily moves, to much lower volatility / smaller daily moves. So, when you see these changes in volatility take place, you need to adjust your money management approach accordingly.

changingvolatility

As volatility changes, so do horizontal levels

If you have read my articles on how to draw support and resistance levels or how to place stops and targets like a pro trader, you already are aware of the importance of support and resistance levels in stop loss and target placement. However, what I did not get into in those lessons is that as market volatility changes, so will nearby support and resistance levels.

You might be wondering about the ATR or average true range, and where that comes into play here. Well, the ATR is a good tool to use to measure the current / recent market volatility, but we are still going to be using support and resistance levels as important barriers to look at when placing our stops and targets. You don’t want to just place your stop loss based on the ATR, because horizontal levels are always the best places to look at when deciding where to place stop losses.

If you notice a market’s volatility has increased or decreased by a lot recently, you need to also look at where the most recent support and resistance levels are when you go to enter a trade. If a market has recently had a big uptick in volatility, you will have to look at levels further away from current prices, to place your stops. Similarly, if a market has recently had a big drop in volatility, you should be looking closer to recent prices to place your stop losses. Also, remember, as your stop loss changes so must your position sizing on a trade, if you want to maintain the same per-trade dollar risk amount you normally use.

srandvolatility

Conclusion

We cannot just jump into the market and totally disregard the fact that it is a constantly changing, dynamic entity. Market volatility is something we must be aware of as traders. We need to make a habit out of observing market volatility every time we analyze the market and make sure we adjust our stop losses and targets as well as position sizes, according to these changing market dynamics.

Learning to recognize and analyze changing market dynamics is a function of understanding price action and learning how to trade from price. This is what I am here for; to help you learn price action trading and to help you make sense of the constantly changing dynamics in the market. Once you fully understand how to read price action, recognizing changing market volatility will be no problem for you, it will come naturally. To learn more, check out my price action trading course and members’ community.

XMAS SPECIAL NOTE: Until December 31st - Get 50% Off Life-Time Access To Nial Fuller's Professional Forex Trading Courses & Daily Trade Setups Newsletter -  Click Here For More Info.
nialfuller

About Nial Fuller

is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading. He has a monthly readership of 250,000+ traders and has taught 15,000+ students since 2008.
Checkout Nial’s Professional Forex Course here.

Now I want to hear from you! - Click Here to Leave a Comment

17 Comments

  1. KRISTOFA OKENTA says:

    Great article. Thank you.

  2. Unah Diamond Bethel says:

    Honestly,i call you Forex Professor.Just keep it up.

  3. Adarkwa says:

    I like what I have just read. I hope you will always keep us educated. Want more of this article to read.

  4. phil caulfield says:

    Brill as always Nial
    Thanks.

  5. Sthembiso says:

    Thanks Nial, well understood.

  6. Promise John says:

    Thank you very much Nial, this is great.

  7. Jeremy Lee says:

    A very timely article, and immensely relevant!

  8. Sthembiso says:

    Does this mean if I was risking $50 per trade I have to reduce it should the volatility decreases Sir?

    1. Nial Fuller says:

      No, it means the stop distance (amount of pips risked) changes. As a result of that, the position size also must change (number of contracts traded).

  9. Robin Pike says:

    You said, “..adjust our stop losses and targets as well as position sizes…” and I understand adjusting the SL and TP targets but once you enter into a trade, there is no way to adjust the position size… or am I missing something?
    Thanks

    1. Nial Fuller says:

      Robin, adjust position size before you enter a trade.

  10. Anthony says:

    wow! this is great

  11. Woodrow says:

    Excellent reminder Nial, thanks

  12. Helen says:

    Thank you team

  13. Issa Maluf says:

    Another very relevant post.
    As a beginner I was yet aware of that.
    Thanks for enlightening us, Nial.

  14. Md. Munjur Ali says:

    Dear Sir
    Nial Fuller,
    Very very useful article for market volatility high and low for take place stop lose and profit terget. And also money management and lot size. Thank You.
    Any how I want to learn with you Price action trade.

  15. Khesiwe says:

    This is wonderful thanks Nail.

Leave a Comment

Your email address will not be published. Required fields are marked *

Disclaimer: Any Advice or information on this website is General Advice Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By Viewing any material or using the information within this site you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here by Learn To Trade The Market Pty Ltd, it's employees, directors or fellow members. Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures, spot forex, cfd's, options or other financial products. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

High Risk Warning: Forex, Futures, and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in forex, futures, and options and be willing to accept them in order to trade in these markets. Forex trading involves substantial risk of loss and is not suitable for all investors. Please do not trade with borrowed money or money you cannot afford to lose. Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results.

legal
Copyright 2008-2016 Learn To Trade The Market