Still Another Common Problem I See Among Traders

I've written about this in the past, but want to underscore it as we start to talk about performance goals for 2010: Traders often focus on market direction and not so much on market volatility. As a result, they have trouble adjusting to markets that become unusually slow or busy.

My recent post on relative volume underscored how much volume and volatility we can expect at each 30-minute juncture in the ES futures. At a longer time frame, take a look at how much volatility we can expect on a daily basis as a function of the market's VIX level.

It is not at all uncommon for traders' performance to also vary as a function of market volatility. Some of the best traders I know can kill it during volatile periods, as market moves tend to extend. They can also overtrade slow markets and lose considerable money when markets aren't moving.

Their greatest challenge is sitting back at intervals during the day (and before the trading session) and asking themselves how much movement might be expected. On average, a busy or slow overnight trade will translate into busy or slow early morning trade; a busy or slow morning will tend to spill over to later in the day. The best estimates of the next period's volume and volatility are what has happened in the most recent periods.

Attention to volume and volatility also can be crucial to identifying valid breakouts from trading ranges. The best breakouts will attract significant institutional participation, so that both direction and volatility are on the upswing. If you can find the occasions when direction and volatility are moving upward in unison--and avoid the occasions when they're both dwindling--you can meaningfully enhance trading results.
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