How Can Market Volatility Impact Futures?

Man touching candlestick chart on screen

Risk management is ultimately what keeps traders in the game for the long haul – the ability to control losses and stay above water in speculative markets. During times of increased market volatility, risk management can become even more critical for traders navigating uncertainty.

Although high volatility can create opportunities in futures markets, traders should also realize that it can create high-risk scenarios. Therefore, it is imperative to ramp up risk management strategies when volatility spikes and be aware of how futures markets can be affected.

Possible Scenarios During Volatility Spikes

  • Rapid price swings: Volatility is characterized by rapid price swings in either direction. As volatility increases, so does the potential for risk of loss. Although volatility presents opportunities for profit, inexperienced or risk-averse traders should avoid trading during extreme levels of volatility.
  • Market delays: Since volatile markets are sometimes accompanied by high trading volumes, this may cause delays in order executions. This can also cause order fills to occur at significantly different prices than the intended price, otherwise known as slippage. While electronic trading has greatly improved the speed at which transactions take place, even these systems can become congested as volume surges.
  • Technical difficulties: High order volumes and internet traffic can also stretch financial systems to capacity, causing technical issues in digital trading. In other words, the very technology that has enabled historic trading volumes can sometimes fail.
  • Lock limits: An uncommon but important outcome of high volatility, futures lock limits occur when price moves substantially up or down from the previous day’s closing price. If certain thresholds are breached, lock limits result in trading halts to reduce market volatility. When used in stock markets for the same purpose, lock limits are more commonly referred to as “circuit breakers.”
  • Thin liquidity: More a cause for volatility than a result of, thinly traded markets with low liquidity often experience high price volatility. Avoiding thinly traded markets can help traders stay away from extremely volatile market conditions. Most futures traders seek markets with high liquidity to trade, since higher liquidity means traders can more flexibly enter and exit long and short positions.

Forecast Potential Volatility with an Economic Calendar

Economic releases can be a precursor for volatility in the markets. While surprise news events are impossible to forecast, keeping a close eye on scheduled economic reports can provide noteworthy insight into market dynamics.

Depending on the information released, scheduled reports can turn calm markets lively in a matter of seconds. Referencing a futures economic calendar is an effective way to keep up with daily financial events.

Bookmark NinjaTrader’s Trade Desk Calendar and stay current on futures last trade dates, first notices, roll dates and contract expirations, as well as other important dates including employment reports & FOMC meetings all in one place.

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