Volatility

Blue Hornet · Nov 11, 2008

I am getting conflicting messages.

On the one hand, it seems to me that if you are a new trader and your initial capital sum is not enormous, then surely the best markets to trade in are volatile ones. How else can you make decent returns? Unless you have a very generous initial investment (say £100k plus), then surely steady markets are not going to provide any worthwhile profit because commissions, spread and slippage will whittle your modest profits down to virtually nothing?

On the other hand, I have also been reading a lot of threads here from which I get the impression that volatility is to be avoided because hefty swings in the wrong direction can bust you out. I understand that but then surely the way to avoid huge losses is with the religious application of stop-losses? That way, you may not gain but at least you don't end up sleeping in a shop doorway.

Am I missing something here? Have I got the wrong end of the stick?

Sorry to be asking so many questions but I am trying to learn as much as I can BEFORE I start any trading for real.

shadowninja · Nov 11, 2008

Part of the problem is that you need bigger stop losses so you don't get wiped out by the noise.

Rhody Trader · Nov 11, 2008

Increased volatility does indeed imply larger potential profits from any given trade, but as shadowninja has said, it also implies larger potential losses. If at a volatility level of V your normal risk is 20 and normal gain for winners is 40, then at 2V you might be looking at 40/80 respectively (not that it's necessarily a linear relationship like that). Because the risk has jumped up, you probably should be trading smaller.

Mr. Charts · Nov 11, 2008

Adjust your position size so volatility doesn't knock you out for greater losses than you are comfortable with using your particular stop technique.
Let's say you have an ATR of .08 on the particular time frame you are using and trade say 500 shares.
If you are trading something with a volatility of .16 then halve the number of shares to 250.
However, that is merely a broad principle and imho, no-one should automatically use ATR as a stop. It's better than nothing, but it's a crude method.
It also rather depends on the instrument you are trading - there is NO UNIVERSAL ONE SIZE FITS ALL APPROACH.
Stocks are different to futures to FX to commodities to options etc.
Different ball games - not the same games merely because they all use balls.....
Richard

raysor · Nov 11, 2008

Mr. Charts said:
Stocks are different to futures to FX to commodities to options etc.
Different ball games - not the same games merely because they all use balls.....
Richard

I think they are the same really. The one thing you have to get right is the direction of movement! Whatever instrument you use there is no getting away from the fact that if you are long the thing has to move upwards and vice versa. I admit that if you are happy to be exposed to £1000 of a stock, you don't buy £1000 of the option (which is an easy mistake), likewise spread betting or CFD. If you are happy to buy £1000 of BP you don't buy £1000 of East Patogonian Oil Slurry Company.

How`many beginners say they wouldn't buy, say, £1000 of RTZ and get only 40 shares but would happily buy £1000 of say, Millwall, and get 5000000 shares ( it would look good in a picture frame, wouldn't it)?
So it's the same game but very different balls!

shadowninja · Nov 11, 2008

They all have different characteristics, though, particularly in the way they will move 100 pips up or down.

raysor · Nov 12, 2008

shadowninja said:
They all have different characteristics, though, particularly in the way they will move 100 pips up or down.

I agree. I had a stock broker "friend" once who lost most of all his clients money account trading, and then, in desperation, suggested they trade options 'because you needed less money to make more money". Guess what happened. I think he is selling T-shirts in the States now!

shadowninja · Nov 12, 2008

raysor said:
I agree. I had a stock broker "friend" once who lost most of all his clients money account trading, and then, in desperation, suggested they trade options 'because you needed less money to make more money". Guess what happened. I think he is selling T-shirts in the States now!

Ouch. I do hope that he didn't fail to sell t-shirts in the southern states and then think, "I know what. I'll try Alaska. They'll want t-shirts in Alaska!"

fakhar · Nov 13, 2008

its not true. some experienced traders able to use volatility in their direction but mostly novice wipe out their accounts

new_trader · Nov 13, 2008

No such thing as noise

shadowninja said:
Part of the problem is that you need bigger stop losses so you don't get wiped out by the noise.

No. You just need to know what is what and what is not. Keep your Stops tight, always.

Jaydee · Nov 13, 2008

Deja-vu

new_trader said:
No. You just need to know what is what and what is not. Keep your Stops tight, always.

Depends on how you trade - after our last debate there are clearly two schools of thought on this one.

Anyway, here is what I consider noise to be (attached).

new_trader · Nov 13, 2008

Jaydee said:
Depends on how you trade - after our last debate there are clearly two schools of thought on this one.

Anyway, here is what I consider noise to be (attached).

What is your pretty picture meant to prove? That the market moves up and down? I see many entries that could have been made with a tight stop. Did you miss them?

Jaydee · Nov 13, 2008

It's not trying to prove anything - it just shows what I would define as noise.

Yes, I did deliberately miss those short-term entries you speak of - that's not my style of trading. I'm a bit longer-term, still intraday though. I like long directional moves - like yesterday.

new_trader · Nov 13, 2008

Jaydee said:
It's not trying to prove anything - it just shows what I would define as noise.

Yes, I did deliberately miss those short-term entries you speak of - that's not my style of trading. I'm a bit longer-term, still intraday though. I like long directional moves - like yesterday.

So, you know what you should miss?

And...you know what you should not miss?

But you argue....

trader_dante · Nov 13, 2008

Look for the limit up or down days. They provide the best opportunity for tight stops

Fortune500 · Nov 13, 2008

Anyone else think this latest Dow move is a dead cat bouncing?

porph · Nov 13, 2008

Yes. However there is probably about a 50% chance I am wrong.

No such thing as 'noise' in my opinion.

Fortune500 · Nov 13, 2008

I'll go with you then

Jaydee · Nov 13, 2008

new_trader said:
So, you know what you should miss?

And...you know what you should not miss?

But you argue....

Come on new_trader, we all have a set up that we look for. Of course I know what trades I should avoid - I'm not going to put a trade on if it doesn't fit my criteria for entry. Therefore, the entries you mention I did not make. Not all that difficult to understand is it?

We're not going to have another episode of your single-minded, disrespectful "my way or the highway" posts again are we? I have stated that there are two schools of thought and my pretty picture was just to give an example of how I see things. Be nice if you could accept someone elses opinion for a change, regardless of whether or not it falls in line with your own, instead of taking the usual path of derision you like to follow.

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