Futures, FX, Risk Management, Trading Education, Trading Tools

Volatility Indicators: Insights into What to Trade and When to Pull the Trigger

When to trade

Finding certainty within our ever-changing global market seems to be harder than ever as COVID-19 continues to challenge everyone, including health care workers, researchers, policy makers, and players in the market.

Day traders might be looking at the volatility of the market through a lense of fear: fear of an unprecedented rate and depth of change in virtually every industry and index. On Monday April 20th, U.S. Crude Oil Prices dropped more than 100% and turned negative for the first time in history. What will happen next? While we don’t know the answer to that question, we can for certain say that change will continue – likely in ways that will surprise us. However, with the right tools, day traders can look at this new wave of volatility and see an opportunity.

By signaling assets that are changing more than usual within the market, and providing statistics on when market decisions are usually made for that asset, Better Trader provides a comprehensive analysis that can help traders make informed timing decisions about their purchases or sales of assets. Through the use of these Instrument analysis tools, day traders can better understand the narrative of change and maximize their gains despite the unpredictable qualities of the market.

Solution:

Better Trader has implemented a few new features for day traders to keep a closer eye and get ahead on purchase/sale decisions for the volatile assets on their watchlists. Now, when many of these assets are changing in the largest extremities they have in decades, the data provided by these tools can be more useful than ever. Opening up the main page and selecting the Charts tab, we can easily locate the “Instruments” section in the bottom left-hand side of the page.

Under this tab, you will find all of the market indexes that are selected in your watch list. We are interested in the instruments on our list that seem to be changing the most – and luckily, BetterTrader has compiled that data and the significance of change in three ways. First,  by clicking on the “Change” column label, day traders can order volatility from the greatest positive extremity to the greatest negative extremity. Once ordered, the presence of horizontal bars underneath the top and bottom-most extremes indicate that this change is significant – that a change of this magnitude is highly infrequent in the market. 

On this day, it was clear that the most significant changes were coming from the energy indexes – specifically, Natural Gas and West Texas Oil. Let’s understand just how infrequent this level of change might be for the Natural Gas index by clicking on its label, and using the Significant Movement Threshold chart to the left of the Instruments table. We can understand quickly with the data in this chart that the observed 10.64% change is extremely uncommon:

a.) The maximum historic positive change in this index was previously 9.25%.

b.) 99.5% of the time, this index observes positive movement of less than 5.47%.

Now that we have identified instruments that are experiencing unique and unprecedented volatility, we need to figure out when during the day to trade these assets. 

BetterTrader has recently added a new figure, pictured below, that illustrates the typical hourly market movements for Natural Gas on a particular day of the week. This particular chart represents the typical market movements when there is a positive gain. We see that the degree of positive change in the market fluctuates. The figure demonstrates how the market is most volatile around 12:00. A trader can utilize the typical hourly market movement to discern the ideal times to trade throughout the day. 

Similarly, the following figure demonstrates the typical hourly market movements for West Texas Oil when change is negative. The degree of volatility to the market ranges throughout the day, with a particularly high concentration in the later afternoon. A trader can use the chart below to understand the fluctuations within the market for West Texas Oil and make trade decisions accordingly.

Once a trader has determined the optimal time period in which to trade for their goals, the average true range tool, pictured below, can give the trader a greater picture of what fluctuations to expect within certain time periods from their execution of the trade. The average true range, located in the details menu of a market, gives traders a picture of what level of volatility they can expect over the next minute, 5 minutes, hour, or day from an asset, regardless of positive or negative changes. It is calculated using the past 14 days of trading data, and is a good predictor of future movements in an asset based on recent trends. Traders can use this tool when considering how long to hold a position, or when considering volatility in deciding whether to buy an asset in the first place. 

With all of this data, BetterTrader offers traders unique insights into the bigger picture of an instrument’s behavior. Beginning with choosing the most volatile and high-potential change assets, a trader can then determine the optimal time period for making the trade, accompanied by a data-backed forecast of how much volatility and change to expect. This seamless train of thought, from the questions of “what to trade?” to “when to trade?” to the expectations of those trades, will surely provide an invaluable tool for any trader’s analysis.

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