Finding Trading Opportunities in Low Volatility Environments

By NinjaTrader Team

What do futures trading and surfing have in common? As any futures trader or surfer will tell you, patience is a key virtue and critical aspect of the game. Traders and surfers must wait for the right conditions before a new opportunity arises. They need to pick their spots and try not to force a move where none exist. And they know there will always be another opportunity just over the horizon. 

In futures trading, market volatility is often seen as a double-edged sword. While high volatility can offer traders larger price moves, low volatility environments can be more challenging to trade. However, veteran traders know that even in the calmest markets, they can still uncover opportunities. Here we’ll discuss some tips for tracking down trading opportunities even in the quietest of market conditions, and we’ll attempt to answer the question: Is low volatility good or bad?

Low volatility: friend or foe?

Tanja Trades joined our livestream recently to discuss her trading strategies and experiences during quiet news days and other low volatility environments. She shared why it’s important to understand market volatility, recognize the limitations of predicting market movements, and manage your expectations. She also stressed the value of accepting small losses and maintaining your cool, even when trades don’t go as planned. 

Topics discussed in this free livestream:   

  • Challenges all traders face when markets are moving slowly  
  • Managing trade win and loss expectations  
  • Benefits of consistent risk management 
  • Making a breakout trade with a risk management stop 
  • Adapting to different market conditions and scenarios 
  • Maintaining discipline and composure after a losing trade

Understanding Volatility 

The term “volatility” can mean different things to different types of traders. Options traders look at implied volatility based on options prices, and stock traders may look at the volatility of economic conditions that can affect corporate earnings. However, most active futures traders look at volatility as a measure of price fluctuations over different periods of time. In all cases, at its core, volatility is a measure of risk. 

Volatility can be observed and measured in a chart in several different ways. Here are some examples: 

  • Choppy: Price bars may zigzag and change direction frequently over short periods. 
  • Spikes: Sudden sharp price movements, overnight gaps, and breakouts may occur.  
  • Price range: Individual bars on a chart will be much larger high to low than most other bars. 

How to Measure Volatility 

There are a few technical ways to measure the level of volatility for a market, but traders often first notice a shift in volatility simply by looking at price charts: bars become larger or smaller, and the magnitude of directional price changes increases or decreases. To better quantify the level of volatility for a market, traders often use both Bollinger Bands and average true range (ATR) indicators. 

  • Bollinger Bands use the statistical concept of standard deviation to measure how far and fast prices are moving in relation to an average. When the outer bands are expanding, volatility is increasing. When outer bands are contracting, volatility is decreasing.  

  • Average true range (ATR) measures volatility by calculating the average difference between the highest and lowest prices over a period of bars. A rising ATR value indicates increasing volatility while a lower ATR value suggests decreasing volatility. ATR is also a measurement of price potential and is often used for determining and setting profit target and stop-loss order levels.

Low volatility market conditions are never the barren wastelands many traders perceive them to be. With the right approach, mindset, and trading tools, traders can find opportunities in other markets and other time frames. 

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