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Trend Followers Adapt and Adjust

If You Consider Volatility in Your Trading, You Can Adapt and Adjust Your Direction

Quick! Volatility is changing. What move do you make? What direction do you take now? Trend following traders use a philosophy of trading that adapts to different markets and different market conditions. Trend following is based on keeping things proportional to the market’s current volatility. The ability to adapt to changing volatility (the market’s daily ups and downs) is built into the core of any successful trend follower’s trading system. If you don’t measure and consider volatility everyday you are missing a core component of trading success.

What do we mean? During a high volatility period, for example, a good trend following trading system will dictate that you trade fewer contracts or shares of a given market. During periods of lower volatility, trend following dictates that you trade more contracts or shares. In other words, trading commitments are increased during favorable risk/reward periods (low volatility) and decreased during less favorable periods (high volatility). This doesn’t mean high volatility is a bad time to trade. It simply means that you can’t trade as much as you can during low volatility periods. Trading the same number of contracts or shares no matter the volatility simply decreases your odds of success. Who wants to do that?

A main reason for always measuring volatility is for the psychological benefit. If you have too much volatility (and your trade size is not correctly decided) in any one position it attracts your attention. Your focus shifts to one particular position and you can lose sight of the big picture. Measuring volatility and then adjusting your risk exposure for any given trade keeps you psychologically balanced. If one particular market has an explosion of volatility you can trust your rules to decrease your trading size to reflect the new level of uncertainty. Sounds simple enough? Perhaps it is, but most people ignore the wisdom.

Stock Tips & Volatility

Have you ever received a stock tip from a friend, CNBC, or your broker that also included a volatility measure? Have you ever heard a market commentator tell you how much of a stock to actually buy or sell within the context of what current volatility is? If you do not consider volatility daily are you not one step closer to the blowout of all blowouts?

More on Volatility.

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