Category Archives: Education

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How To Deal With Volatility

What Do You Do When Volatility Is High

Volatility is a common feature of the market place and a fact of life that all traders must come to terms with. Volatility in and of itself is nothing more than the movement of the market but can be force in and of itself. Sooner or later volatility will bite you in the ass and that is a simple truth. Volatility c an be either up or down, high or low and does not take trend into consideration. Of course, a trending market can said to be volatile if it is moving at a rapid pace, or if momentum picks up, or if it is affected on a day to day basis by news or fears. The key is knowing how to apply volatility to your trading and what to do when it strikes.

  • Volatility – the basic definition of volatility states that is a statistical measure of movement in an assets price relative to a standard deviation, past price history or both. In layman’s terms it means a measure of how much an asset is moving in relation to how much it has moved in the past. This relation is used an indication of risk, the more volatility the riskier the asset. The assumption being that an asset with higher volatility is more likely to move against you.

The first question to answer is if volatility is high or low? This can be done using a variety of indicators that focus on this metric. Common ones include relative volatility, historic volatility, implied volatility and Bollinger Bands ™. They all use different formulas, and compare price movements in different ways but are all based on comparisons of price movement. I myself like to use Bollinger Bands(tm). These are an envelope trading tool designed by John Bollinger in the 1980’s. The envelopes use a moving average as the central signal line and then the same data is used to create the two bands based on the standard deviation.

Bollinger Bands, Volatility And Trading

Bollinger Bands are a great tool for traders. They are a fantastic tool for measuring market volatility as well as for providing technical clues and entries for traders. The bands give two kinds of signals. The first is the widening and narrowing of the bands. When the bands are narrow volatility is low and when they are wide volatility is high. As a trader you can use these signals as indications of when you may or may not want to trade a specific asset.

The second kind of signal, and those that are more useful as a short term trader, is price action. There are some generally accepted rules for using price action along with Bollinger Bands ™. The thing to remember is that these signals do not take trend or conditions into account so you will probably need to use some other trend identifying analysis as well.

How It Works 

The bands provide a target, or limit, to how much movement to expect. They represent an extreme of price. When prices reach the upper level the market is extremely bullish, when they reach the lower level they are extremely bearish. You can use these extremes for entries. If the bands are narrow, and prices move up to touch or cross either band it is likely that prices will continue to move in that direction into the near future. If prices move outside the band it is particularly strong signal.

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The moving average is also a good place to take signals. If prices moves from one extreme to the other you can take a signal on a crossover. You can also use it for support or resistance. If prices are moving from one band to the moving average and do not cross you can assume they will move back to the other band. In order to get the best signals, and to weed out the falsies, you really need to use support/resistance, trend and momentum to help confirm them.

So, What To Do When Volatility Is High? 

If you are a risk averse trader you may want to take a step back and wait for things to calm down. If you are quick and savvy enough you can use it as an opportunity for profits. Volatility means the market is moving and movement is what we want as traders. More movement means more chances for profits, you just need to be quick to get them.

Tips for successful trading

Some Tips For Successful Trading

Get In Tune With The Markets

This is a list of some tips I have developed over the years to make sure that my trading is successful. I know that I can never expect to win every trade but I can strive to win as many as possible, to limit my losses and basically to make sure that I am as ready as possible to make good trading decisions.  I have categorized my list into 4 sections; longer term prep, short term prep, what you might not consider and things I never do.

Longer Term Preparation For Trading 

  1. Education is the root of success for any endeavor. The more you know, the more you learn, the more you mature as a trader the better you will be. Education is not limited to tools or strategy but also includes fundamental analysis, market mechanics, economics, trading psychology and any other subject that helps you to grow. Education never should never stop, you should always seek out new information. Each new angle you learn will give you a new insight to the market.
  2. Strategy is how you make trades. Your strategy is the framework that guides your actions.   I always stick to my strategy to ensure that I am not making random or knee jerk trades. It’s OK to use more than one strategy, or a combination of strategies so long as you can keep them organized. Using a different account for each strategy is one way to do it.
  3. Money management is how much I trade. Money management is the key to long term success no matter how good a trader you are. By keeping your trades small you never risk your whole account on one trade, or one streak of bad trades. By keeping your trades set to a percent of your account you can make sure you never trade too much while also allowing your trade size to grow with your account. The average successful trader will risk between 1% and 5% of their account. 1% is a very low risk tolerance,5% more risky. I use the 2% rule as a standard for the Geek Account, my weekly tips column on BinaryOptionsThatSuck.com.
  4. Fundamental analysis is the study of the economy, business and market conditions. It is crucial to understand the underlying fundamentals of the market in order to better understand trend and how the market might react to a change in those fundamentals. I follow economic data on a week to week basis, it’s not important to become an economist, just to keep up with it the same way you do the local sports scores. Think of it as keeping score on the economy, when things are good the bulls are winning, when they are bad the bears are winning.

Short Term Prep 

  1. Checking the news is the first thing I always do. I use a variety of sources including email alerts, a news app on my phone, the TV and the internet. I always wake up, at least on trading days, by 8AM eastern time so that I have time to catch up on it all while drinking my coffee with leisure. I check up first on Asia, because the trading day starts in the East. I move on the Europe because those markets are open in the early part of my day, ahead of the US open. After that I move on to domestic news and then drill down to any specific reports or stories I want to know more about.
  2. Checking the charts is the last thing before making a trade. I browse through, always before the opening, looking for the asset I think is best for day trading and longer term signals for the Geek Account. I am a trend follower and make all my trades based on trend following signals, which include corrections and reversals, depending on the time frame, asset, analysis etc. I never force a trade on a chart, either it’s there or it isn’t. If it isn’t then I move on to the next and the next until I find the one I like all the while waiting for the signs to develop.

What You Might Not Consider 

  1. Rest is very important to trading well. Staying on top of the market is mentally challenging and requires plenty of sleep and good nutrition.  You need to be sharp and staying up late is not how you stay sharp.
  2. If you treat trading like a hobby, or a game, it will treat you the same way. Hobbies may make you money but you don’t get rich on them whereas a game, if you lose who cares, it’s just a game. If you want to have real long term success you have to treat trading like a business, make good trading decisions for your business, manage your business’ money well and it will take care of you well.

Some Things I Never Do 

  1. I never let my account balance influence my trading. It is easy to be tempted to trade too much, or too often, or too risky, or all of the above, for both greed and fear. If you are winning a lot you may want to win more, and more. If you are losing a lot you may want to try to win it back quickly. You need to know your balance so you can apply money management but you must always follow your risk management rules.
  2. I never let my open trades affect my trading decisions. Sometimes I may have 5 or even 10 trades in the red. This can be quite discouraging and I admit, is something hard to ignore. I don’t ignore it, I just don’t let it bother me. I know that over time I win more than 60% of the time, I also know that my money management is protecting my account like it always does. I usually don’t even know that I have a losing month until after it happens and I tally up all the trades that closed in that month.
  3. I never trade more money than my risk percent. I never trade less money than my risk percent.  I always trade my 2%. If for some reason that I can’t trade exactly that amount (broker trade size/increments for example) I will round up, not down.
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Fundamentals Drive My Trading

I began trading with the idea of using pure technical analysis. The basic tenets of TA, that all things are known by the market or will be known, and all that knowledge is represented in the charts, was a big draw for me. TA broke trading down to simple price action, technical indicators, candle charts and I was enthralled.

However, over time, I have also come to love the fundamentals and view them as a primary driver of my trades. If the trend can be likened to the tide in the ocean, the fundamentals are the ocean itself.  The fundamentals lay the foundation for the house to be built on, they prime the canvass so that the master can create a painting and are the waters from which the market tide will flow.

My description may sound esoteric and philosophical but its true. Imagine a foundation being laid for a new building. As more and more details about that foundation become apparent you get a feel for what the building is going to be. Each brick of the building is important, and adds to the whole, but on an individual basis means very little in terms of what the building will look like. The foundation, the fundamental basis the building is built on, gives the building its character. Is it a house, an apartment building, an office? Once you get a feel for what the building is going to be you can start to make educated guesses, speculations, about what it will look like, how many rooms it will have and when it might be finished. The same is true for the financial markets. When you have a grip on what the fundamentals are you can make better speculations on where the markets are going.

What Is Fundamental Analysis

In terms of trading, fundamentals can refer to a couple of different things, depending on which market you are talking about.  Sometimes there is more than one fundamental driver of an asset, sometimes those drivers are in line with each other and other times not. For a stock fundamentals can include the state of the economy, the health of the business, revenue, product pipeline, consumer sentiment, inflation and other economic indicators. For a commodity supply and demand is the biggest fundamental driver although economic conditions have a lot of affect as well. These factors are used to determine if an asset is under, over or fairly priced.

Fundamental analysis also ties into the greater market cycle. The economy cycles between growth and recession and those cycles drive market values. GDP, Gross Domestic Product, is one factor that can be followed as an indicator of the greater market cycle. This is the sum of the output of a region, a country or the world.  Rising GDP, expanding or contracting GDP growth and expectations for growth/decline can affect prices from the near to the long term.

Another thing to consider is how fundamentals affect individual assets. A bullish economy may be good for stocks but it is not good gold and can be both good and bad for oil. Rising GDP and rising GDP expectations are closely associated with a rising stock market. Rising GDP is also associated with rising currency value. When a country is doing well its money becomes stronger.

Within the GDP data, which is usually released on a quarterly basis with monthly revisions, are other fundamental economic drivers of the market. These shorter term data points are drivers of shorter term trends within the greater market cycle. Employment and jobs are perhaps my favorite but there are numerous gauges of inflation, manufacturing, housing  and the consumer that must also be included. Each of these gives a different view of the underlying economic conditions and has the power to move the market

How I Trade The Fundamentals

I like to keep abreast of the economics and the current data so I have a grip on what’s going on, a view of the foundations so to speak. I let the data come and the market do it’s thing. I don’t use any one data point as a trigger other than what the market tells me to do. I have a an understanding of the fundamental conditions but I still let the technicals dictate my trades. A rising tide of fundamentals will show itself in the charts in the form of an uptrend or bull market. As the fundamental picture unfolds there will be catalysts for rallies and corrections and all will be present in the chart as a signal in one form or another. When the technicals and the fundamentals agree, and the signals are in line I make a trade.

My approach to fundamental trading is exactly the same as technical. When the fundamental trends are up, I trade up, when the fundamental trends are down I trade down.  The technicals provide my signals, when they agree with my fundamental look I know I can make a good trade with confidence.