Market Volatility

"Avoid volatile markets
like the plague."

Volatile markets are more risky than other markets but because risk and reward are inextricably linked - volatile markets are more rewarding than other markets too.

All markets are volatile sometimes and are not so at other times. If you are looking for the opportunity to make profits, then you must have volatility too.

The question is -how much volatility is too much?

The answer depends on you. How much risk do you want to take?

If you are prepared to take more risk, then bigger returns will be available to you than to the trader who wishes to limit his risk more.

Successful traders pay a great deal of attention to risk control when they evaluate their systems. Selection of the markets they will trade is a major input to this.

Any unsuitable markets (e.g. erratic, lightly traded) will be eliminated at the outset - but then the effect of the natural volatility of normal markets still has to be considered.

The method employed by professional traders handles natural volatility by assessing the risk resonance of the system against the trader's goals for risk and return.

Systems that prove to be satisfactory up to this point are then fully evaluated to see if they are capable of meeting all the trader's requirements.

You do not want to avoid volatile markets, you want to trade them - but only on your terms.

If a market is volatile because it is lightly traded, then this is a different matter. It is likely to over-react to activity and produce erratic price movements. These markets are best avoided when you make your commodity selection.

 

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