Monday, November 02, 2009

A Quick Look at Enhanced Volatility

Note the price ranges for the various five-minute bars in the ES contract, with many periods moving 10 ticks or more. Volatility not only affects daily trading ranges, but also the ranges of short-term periods in the market. When traders don't adjust holding periods to increased volatility and trade their usual size, they undergo enhanced P/L swings. That, in turn, can lead to increased emotional swings.

Interestingly, a trader may not be willing to triple his or her size from day to day, but will trade identical parameters in slow markets and in ones that are three times more volatile and busy. The frequent sweeps up and down across the five-minute periods this afternoon have been particularly frustrating for traders, as P/L can swing greatly in a short period of time.