The first half of 2017 has seen low volatility become a major feature across financial markets. Indeed, the VIX has posted the lowest close since 1993 following a record run of low closes. Weve also witnessed the lowest level of volatility in three years across G10 major currencies; and likewise, volatility in oil prices and U.S. Treasury has proved worryingly low.
Such scenarios present difficult trading conditions, none more so than for trend traders who are questioning, and rightly so, which technical indicators they can rely on. Many studies have shown VIX and S&P500 responding differently to their usual correlating pattern, and moving in opposite directions since the start of 2017, as is clear in the graph below. Therefore, we need to adapt along with the changing conditions, and can now use this as an indicator for the movement of S&P over the next 6 months.
As well as keeping up to date with market news and trends, in order to ensure we stay on the right side of the markets, we have devised a 7-point plan for trend traders:
- Bank Holidays – Public holidays in the US, UK and major European Countries such as Germany can dramatically affect the volatility and trading conditions of certain markets. Asia is not generally such an issue if you are trading London or New York market timeframes as it is night-time in Asia anyway. We diary 6 months ahead all major bank holidays and do not trade on these days. We also check month by month in case we have overlooked any, or a rare spontaneous holiday is announced.
- Red News Days – We use Forex Factory as a source to note the major bank and government announcements that will have a profound effect on markets. Our strategy instructs us to avoid trading around such events by a two-hour margin either side of the event. This is because the markets are likely to move away from the predetermined trend pattern we would normally trade.
- Trade a plan – We trade a tried and tested plan with its own set of rules, which has been back-tested over a five-year period and has a proven track record. By doing this, we discount emotion in our day-to-day trading activities. The rules are not mechanical; rather they are simply a guide of best practice and rules by which to trade most effectively.
- Multiple Classifiers & Volatility Indicators – We believe in using many different indicators for both entry and exit points in markets. By this we mean that we that we would not rely on one solitary alert as an indicator that there is a potential trend in a given financial market. Instead, we would use momentum, strength and directional indicators in combination to ensure a false alert doesnt present itself. We also rely heavily on market patterns to prove consistency in the market, and therefore do not trade at times when consistent patterns are not visible. An example of an indicator we use to determine unusual market activity is Quantums Dynamic Volatility Indicator.
- Walk Away – Emotion can prove critical in trading; indeed, the psychology of trading has created an entirely new topic and revenue stream for many businesses. Owing to the rules and guidelines we have enforced, we are able to step back at crucial points and exit a trade at either the greatest profit or smallest loss. If we feel we have traded intensely for a prolonged period, we ensure that breaks and exercise are strictly adhered to.
- Scalp alongside trends – There will be days when markets move within a very tight range, leaving limited opportunity for trend trading. On such occasions, we would opt to scalp trade using the rules of our secondary system for short periods at peak market times. If we feel scalping is too risky, or the market is showing signs of over-heating and heading towards a break-out then we would again walk away.
- Take both profit & loss – Risk management is key to any trading strategy, none more so than in times of extremely high or low volatility, such as those we have currently been experiencing. For this reason, we set tight stop loss and a profit that allows for an extreme market move, but can be lowered to a realistic level taking into account key support and resistance levels provided by Fibonacci. This way we can see first-hand the times when the market is operating within tight ranges or a new trend has the momentum to fulfil its potential.
By following this plan, we find our trading to be both consistent and profitable. We hope you find this useful and trade successfully through this unpredictable time.
For more information or to follow our trades please visitwww.thepiphunters.com
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on thiscolumn and on all issues relevant to the institutional trading community. Please send your comments to jdantona@marketsmedia.com
