Thursday, March 04, 2010

An Updated Look at Volatility and Opportunity

Here is the S&P 500 Index (SPY; blue line) plotted against the 10-day average price range for SPY (pink line). We can see that the pink line of volatility looks almost like the reverse of the blue line for stocks. One of the great trading challenges that I'm hearing from traders is adapting to the slower trade and narrower ranges as markets move higher. This is one reason I ground myself in the daily price targets published each morning via Twitter. Those are adjusted for the market's recent volatility, telling me how much price movement to expect daily. Knowing what is expectable helps traders frame their risk and reward realistically, taking what the market gives them. If you think about it, the smaller the price moves, the more important execution becomes to daily trading results.