Thursday, March 15, 2012

Volatility is not good for traders

Many novice traders have the wrong impression that volatility is good for traders. My observation is: Volatility is the enemy of profitable trading.

Broadly, volatility is large range movements on both sides of the market - up and down. If markets are going to swing up and down both, traders cannot make money. Trading needs a trend to make money. Volatility is - Abrupt changes of direction and then large moves in the opposite direction. There is no trend. Therefore, the trader cannot take a position in anticipation of trend continuation.

Newcomers are thrilled at the idea of big moves, say, for the Nifty. When markets move 100 points up and then suddenly 100 points down, they think there is money to be made. The opposite is true. When we cannot judge the direction of the market, how can we even take a trade?

Big news days have large volatility. The best way to trade such days is to avoid trading. Think about this: out of 240 trading days, there may be 20 or 30 big news days. So even if we avoid trading, there are still 220 or 210 trading days to try our trading skills.

The first move is: keep your losses small. Avoiding trading on volatile days avoids losses.

16 comments:

shruti said...

I find it hard to believe any analyst,however, reading your past posts made me feel that maybe u write what is possibly true, I too am a student of TA and looking at your calls made me so angry at times when i see them going the opposite way and it made me feel that why couldn't u see what i see in these charts. But may be that's what TA is, everyone has a different approach and eye for looking at charts..

Dinesh Rishi said...

Thanks Sir

for teaching us Trading Discipline

rocky said...

repected sir,

i was reading ur old views in which u said u write daily what u did in mkt hours which trade u taken and why ? means why you enter in the trade and when u exit i will be glad if you share here or in the news letter in the evening.

sudhin said...

Personally I have found volatile days to be the best days to make money especially in the cash segment, wherein orders are punched in without stretching the limit. I find trending markets more difficult to trade, especially if I get the trend wrong.

Ammature trader said...

http://www.bloomberg.com/news/2012-03-15/saudi-billionaire-s-gold-find-may-double-ethiopian-production.html

Hi Sudarshan,

Does this mean anything for the price of gold. Can this new find bring down the price.
Please do reply.
Regards

SWEETY said...

Dear Sir, I differ with you on your observation that *Volatility is the enemy of profitable trading*...

I think it is not volatility - but choppiness with in a very short is the real culprit that drives even a well experienced disciplined trader crazy.

I wish to reproduce the essence of an important article that i read some where in the net few years ago.

It is said there that, if anyone wish to become a successful fighter pilot or specialist doctor etc - he needs to spend a lot of time learning / training / practicing which also required some minimum capital. I am mentioning the amount spent there as capital, as you are investing in your self. The same rule applicable to become a successful trader. One need to have a cutting edge knowledge of identifying the trend change points well in advance and more importantly he should practice with military type discipline of adhering his own rules without any deviation. There is no quick fix solution or short cut.

Once a person is well trained, he can always make money in a volatile environment - but not in choppiness. I wish to produce a recent example - Nifty future trades on 06-Mar-2012. trade range of the day was approximately 170+ in bothway. It was in deed a boon or bonus to the traders like me. With in a single trading session, a well experienced trader can catch at least 70% of range it covered, that works to approximately 240 points. I remember during October 2008 capitulation nifty movement was 400+ points in a single day. It was life time opportunity to traders like us.

This is the biggest question before us: Should one avoid such opportunities or equip himself to make use of it to gain handsomely.

Balu said...

Sir

I went long in nifty at monday's closing, held on to it until today moring.. I was desperate to close it since yesterday night and in the morning at 8.20am listened to your comments on tv and may be I was the first one to see this post at 9.10am. I called my dealer and exited at 5480 at 9.15.46am. However my stop would have triggered when market went below 5400.

Your suggestion to avoid trading on highly volatile days is the best one.

My next trading idea is to go long on closing above 5500 and short on closing below 5400 for second consecutive day..

Thanking your for the best advice..

Regards
Balu

Sandip said...

Sir, yr technical view on Wockhardt pharma, i have invested heavily around levels of 250-275..It has touched multi-year high of 575+ after so long time..Should I book the profits or continue to hold?? Wht r the charts saying? Plz guide..

Regards
Dr. Sandip

ramprasad said...

hi skhani,
SIR, I REMEMBER WHAT U SAID ON cnbc at 3.33pm i:e; no trade on big events. REALLY SIR THAT exactly true.
I TRADE ONLY ON INDEX.IF I ENTER AT ANY LEVEL SURELY MY stop WILL HIT.
LASTLY I SHOULD SAY thank u.

Eagle Watch said...

Sir,
Can you pls guide:

a. what as a trader ( taking position for 1-3 days time frame) time frame chart should one consider ?

regards,
sailendra sharmaa

Eagle Watch said...

sir,
Pls guide as a trader ( taking position for 1-4 days point of view) which time frame chart I should use.

Pls. excuse me for this type of foolish quesion.

Regards,
Sailendra sharmaa

Jitender Yadav said...

Sir
I think each trader has his/her own niche in markets. for some traders, they love scalping volatile intraday moves while others like trending moves that last for day or weeks. But sadly most do not know their niche or are not in harmony with that.To know the markets one has to first know him/her self.
Your fan
Jitender Yadav
New Delhi

ramprasad said...

hi sukhani,
need help
to day 21/03/2012, i sold 5300 call at 63 my sl is 71.30 above the day high. sl triggered.
my strategy is,market open lower then yester day close.so i sold for 5300 call.when nifty trading at 5290.
nifty crossed days high. And i close that.
my humbel request u sir and fallowers of this blog please help me is there any wrong in this strategy or its common thing.i am day trader.

Naran said...

Sir,
Is Nifty is now moving in a symmetrical triangle ?????

Vasant kumar said...

Hi,

I found this in a journal, I felt worth sharing with u people.

"Markets offer enormous temptations, like walking through a gold vault or through a harem. Markets evoke powerful greed for more gains and a great fear of losing what we've got. Those feelings cloud our perceptions of opportunities and dangers. Most amateurs feel like geniuses after a winning streak. It is exciting to believe that you are so good you can bend your own rules and succeed.That's when traders deviate from their rules and go into a self-destruct mode.Traders gain some knowledge, they win, their emotions kick in, and they self-destruct. Most traders promptly give their "killings" back to the markets. The markets are full of rags to riches to rags stories. The hallmark of a successful trader is his ability to accumulate equity."


Hope this would be helpful

Thnaks

Avijeet said...

Sir
Today NIFTY FUTURE break and close its recent downward triangle pattern at 5200,
but the INDEX is hold its 5171 level with same pattern. Sir please tell me, what
trading decision can I take now ? go short or wait ?

Regards
Abhijit Patra