Is Volatility Good For Trading Futures?

The month of September, 2011, brought more sell-off and with it, dramatically more volatility. The Dow Jones Industrial Average (DOW) dropped 6% for the month, and for the the entire quarter, was down 12%. This is the worst quarter since March of 2009. At end of the quarter, the CBOE Volatility Index closed at 42.96, very elevated. One day the Market is up 200 points with European debt relief “clearly” at hand. The next day the Market is down 200 points with no European debt resolution possible. With so much volatility, how does this affect trading Futures?

According to Wikipedia, volatility is defined as “a measure for variation of price of a financial instrument over time but with the last observation on a date in the past.” Investopedia sums it up well by saying, “volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.” With what is going on in Europe, especially Greece, Spain, Portugal, Italy and Ireland, risk is definitely the operative word.

But does uncertainty or risk mean that you cannot daytrade Futures? In a nutshell…on the contrary. In fact, the more uncertainty, the more apt you can capitalize on Futures trading. The only time there can be no trading is when the price is flat. The last week of September alone, Crude Oil futures rose and fell by $3 (300 ticks — 300 price movements) almost on a daily basis. At $10/tick movement, that’s huge.

Why would Futures trading benefit in a volatile market? Futures trading tends to stabilize the price of its underlying securities. When market volatilty increases due to environmental or geo-political factors, both hedgers (producers or users of the commodity or financial product underlying any given Futures contract) and speculators (those willing to take large risks in return for potentially large gains) adjust their trading patterns to reduce risk exposure, resulting in a liquid, more efficiently run market.

For daytrading, risk adjustment translates directly to trading opportunities. Dramatic downswings of ticks on the Dow and S&P 500 followed by equally dramatic upswings offer short-term investment opportunities. During the course of the day, the S&P500 E-mini (ES) routinely trades in 10 “Handle” increments, where 1 Handle = 1 point or 4 ticks. So 10 Handles = 40 ticks, up and down. Daytraders (Speculators) are Going Long on the ES (Buying — betting that the price of the ES contract will go up) for a few points and then selling. They quickly reverse direction, Going Short (Selling — betting that the price of the ES contract will go down) and close their trades afterward. These Daytraders are, in essence, making money on both the upswings and downswings, back and forth, all day long. The more hedgers adjust their trading patterns for the geo-political environment, the more upswings and downswings the Daytraders are profitting.

Remember, the only time Daytraders do not make any money is when the market is flat. With intense volatility, constant re-adjustment of portfolios to compensate for economic news, the more Daytraders thrive.

Don’t be afraid of a volatile market…jump in — the water is fine!

Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to or call 866-617-2037 today.

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