Thursday, July 23, 2009

Thoughts on Low Volatility Markets and Trading Slumps

The chart above shows how average five-day trading range (volatility; red line) has been steadily falling since the March lows. The average daily range is now about a third of what we were seeing earlier in the year. This is the main reason why the profit targets that I work with are adjusted for recent volatility. (Note: SPY targets are posted each morning prior to the open via Twitter; subscription is free).

Without such adjustment, it is very easy to assume that markets will move further than they actually will. This leads traders to be slow in harvesting profits.

I hear traders say that there is no opportunity in the current markets. That is not completely true. I find that recent moves set up much the same as they do in more volatile, busy markets. It's just that the moves don't travel as far. A move above the prior day's high that cannot sustain buying and moves back to the volume-weighted moving average (such as yesterday) is the same basic setup whether the market is swinging or slow.

The key is adjusting one's expectations of those setups--and having the patience to wait for them to set up. What setups and times of day are contributing to your profitability in the recent market? Grounding yourself in what is working is the first step toward exiting a trading slump.

More about breaking trading slumps can be found here.