How To Predict Volatility – And The Best Market Conditions For Day TradingMarch 28, 2012 by Chris Dunn

It can really benefit day traders to have an understanding of what’s happening on a longer-term basis in the markets. Not only can you gain a sense of volatility and market direction, but the bigger picture can help you predict what type of trades you might see the next day. In other words, bigger time frame charts can add to your trading edge, but you shouldn’t let a long-term bias take away from what your intra-day charts are showing you. After all, the most important information is what’s current & relevant to the live market.

The Best Market Conditions For Day Trading

We typically find the best market conditions for day trading when there’s high volatility. And when fear or panic is present in the markets, we typically see the highest number of trades and bigger average winning trade size. Now, the markets are cyclical and switch between periods of trending, consolidation, and even erratic oscillations that don’t make sense to most traders. In the video below you’ll see a few tools to help us anticipate volatility and market direction

How To Trade In Less Volatile Market Conditions

Day traders can see nice intra-day trading opportunity, even if the market is slowly trending or moving sideways. The key is to spot when the market is moving with strength, and when there’s no compelling movement in price. No matter what system or technical analysis you use, if you try to trade a choppy or whipsawing market you will lose money. Like someone said in our trading room this week, “Trading is like surfing. If you try to catch every little ripple, you’ll miss the big waves”.

So how can you go about trading markets that aren’t highly volatile? Here’s a quick checklist:

  • Hunt for the markets that are showing the most current volatility. For example, the S&P 500 (Symbol: ES) has been a great market to trade since 2007. Right now the Russell 2000 (Symbol: TF) is showing bigger trading ranges, and higher average daily trading opportunities. Also, the oil futures (Symbol: CL) has been giving us some beautiful intra-day trends.
  • Give the market a chance to show you it’s ready to be traded. This week we’ve seen the markets start off slower, then pick up in the afternoon. Again, it’s all about the ebb and flow of the markets. Historically, the mornings have given us higher than average trade setups, but sometimes it will reverse.
  • Anticipate when the market is changing from slow to highly volatile. Traders get paid for correctly anticipating what’s going to happen next, then having the confidence to execute on what they know. So, be prepared when you start to see the market go from a slow/confident trend into a kind of panic.

 

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