Wednesday, 22 June 2011

Relative Volatility

In looking at the profit potential of a trade, I look at the relative volatility. What does that mean?  Well, to me, it means how volatile the market is in the now - in the last few minutes or last bars.

This is important because I want to know how quickly a profit target may be hit. If the market is moving slowly, a lot of random things can happen between now and when the target is hit. Maybe even an adverse move that would stop me out. So I adjust the target down to be more compatible with the speed of the market and plan to re-enter after my closer target is hit if there is another pullback.

This protects my win rate and overall profitability and can even improve profitability if the pullbacks eventuate.

Relative volatility also impacts the level of stops and targets. Trading levels are dynamic and related to context. Context is made up of the whole scenario. The key is to get the trade on but only the trades that meet the trading plan. Having a trading plan that explicitly describes the trade picture and trigger is an important feature of CP. making the entry into an algo is even better.

Relative volatility was lower ahead of the FED press conference. There were good trades as you can see but the targets had to be more modest. The attached chart is a 0.75 box Renko of the ES.


  1. Tom: what's the smallest target you consider appropriate before entering a trade on ES/6E? 2pts/15pips? less than that? Thanks. -J

  2. Hi Tom, What are you using for volume these days? I haven't seen it on your charts in a while.

  3. J, depends on the context. Sideways markets I'll trade for as little as 3 ticks. Trending, I'll want a lot more, 5, 7, 9 as a first scale out.
    Anon 21:52, Still volume breakdown and also how quickly it takes to complete a range bar.