If you answered no to any of the questions in the title I have to wonder about your sanity. While I don’t mind trading some volatility in a trend, a non-trending highly volatile market is the recipe for a trading disaster, yet many new traders wade into these markets with a sense of gusto and purpose. Maybe I’m just getting old, but highly volatile markets have cost me a good deal of money over the past years.
I suppose at this point we should define volatility as it relates to e-mini trading. I use the Average True Range x 2 (ATR x 2) to get a sense of the volatility that I can expect from active traders and the normal market noise that is always present. Often times, however, this market noise can swell to a level that has a direct effect upon your trading, and when you add the hyperactive traders into the equation you can have some highly unstable e-mini trading conditions.
Let’s look at a couple of examples and see which scenario seems to be most conducive to profitable e-mini trading:
· Example 1: The market has been in a solid downtrend with noticeable retracements for two hours and the ATR is 16 ticks. (I calculate the ATR by using a three minute chart) This market has not made a new high or a new low for the day, but appears to be headed toward a test of the low for the day in an hour or so if it continues at its present pace.
· Example 2: The market started the day with a very hard drive to the daily low, bounced, and is now approaching the daily midline. The ATR is 17 ticks.
I have made this example fairly simple but let’s look at the numbers for each example. In example 1, you would need to set your stop loss at 32 ticks. (ATR x 2) In the second example the ATR would be set to 34 ticks. The question you have to ask yourself is whether or not you’re willing to risk 32-34 ticks on any given trade. If you have a small e-mini trading account, I don’t recommend trading more than a 20 point stop, which means that an ATR of more than 10 should make you consider whether your account is large enough to trade under current market conditions. However, a common mistake by most new traders is to set their stops very tight, say 10 ticks. Of course, the vast majority of the time you will get stopped out by the volatility. You cannot set your stops at 10 ticks in a market that requires a 32 tick stop loss. Set your stops correctly, and then set your target at 1.5 or 2 your stop loss setting. At the very least, set your profit target the same as your stop loss. Remember, never risk more than 3% of your futures trading account on any given trade.
Oh, you are probably wondering which example I felt was the most tradable; assuming I have an account size of $25,000, I would love to trade example 1. Why? Most trades to the downside, on average, move twice as fast as opposed to the moves upside, which tend to be more plodding in nature. I am also fanatical about trying to trade with the trend. Example 2 presents us with a very unstable market that is volatile and unhinged; neither the bearish traders nor the bullish traders are able to establish control of the market so they engage in a financial tug of war that is difficult to read, understand, and trade. I would be hesitant to risk 34 ticks in a market like this. No, on further thought I would not trade this market.
Each of these trades was fairly similar in nature and that they had comparable metrics but the context of each trade was quite different. Even though the stop loss figures were very similar, the chance for success depended solely on the context of the market at the time of trading. The context of example 2 showed no pattern and should be avoided.