How to Trade Successfully During Periods of Volatility

Today, we are going to discuss volatility or swings in price, up and down throughout the day, week, and months.   Volatility often restricts patterns from playing out as expected.  The pattern may start its move, maybe even confirm an entry and then, it quickly changes direction, causing the pattern to fail and head in the opposite direction.  Then, maybe we consider jumping into a trade as it heads in the opposite direction, it gets started, confirms and then it too puts the brakes on and turns, so that it now heads back in the previous direction.  These swings cause even experienced traders to question their strategies and the ability to trade successfully.  Is it possible to have profitable trades during volatile periods?

Often, the end result of volatility is for price to go rather flat.  Up and down and up again, one move negating the other.

Let’s look at a few charts, and then we will discuss how to successfully trade.

This first chart is a copy of a weekly chart for Oracle Corp. (ORCL) Its most current trade period covers 9 weeks of back and forth movement or 45 days. Each candle contains the trade movement of a 5-day period. You can scan back and see other flat periods.  I marked just a few.  Chances are if you entered a call or put option trade during any of these periods, thinking it was ready to move in a specific direction, you would have had to close the trade as it hit loss limit or triggered a sell signal.   This volatility isn’t just connected to weekly charts.

The chart is Oracle’s daily chart.  Each candle represents a day’s movement versus a week.

Again, the candles form pretty tight, flat trade periods.  There is a day or two here and there that move up or down, but they quickly reverse and swing in the opposite direction. Usually, daily charts create trades that are held for a week or two and sometimes longer.  The back and forth moves are crazy and would have resulted in numerous losing trades or sitting on the sideline waiting for confirmation that the volatility has ended.

The next chart is a 60-minute chart where each candle represents an hour’s price move.  I didn’t mark all the volatility swings or the chart would have been solid circles, but I am sure your eye can pick all the days that price gapped in one direction and then flipped and headed in the opposite direction, going back and forth. 

I am going to skip the next shorter time frames and move on to a tradeable period. Many traders who can devote time to routine trading can look at charts for a couple hours a day and are able to make successful trades during those periods of time, even when it is volatile.  The key is to have a cash trading account versus margin so there is no restriction against day-trading (opening and closing a trade on the same day.)  Most margin accounts only allow 3 day-trades in 5 consecutive days.  In a cash account, there are no restrictions.

This is another Oracle chart but is a 10-minute chart. Where each candle represents a 10-minute trade period.

On August 10th, a put trade could have been entered that would have been held for about 2 hours, 10:00 – 12:00.  I am going to share the details of the Call trade on August 11th.  This was a trade that was shared by one of my traders who uses the trade patterns that I teach (primarily the P3 patterns, zeroing in on the strength stage of the pattern.  The strength stage is taught and used in the Alpha program on daily charts.)  Based on what is taking place on the trade-day, this trader adjusts the chart time frame he is going to focus on.

On Friday, August 11th, he bought the 113-strike with Friday’s expiration date shortly after 1:00.  So, the option trade was only valid for that trading day.  He paid $.08 for the 113 strike Call or $8 for the 100-share contract.  I am not sure how many contracts he purchased.  Let’s just guess and say 10 for $80.  He closed the trade about 1.5 hours later, shortly after 2:30 for .38 or $38 per contract.  This means he paid $8 per contract and received $38 after holding the trade for about an hour and a half.  Not bad! And, for 10-contracts that would have been $80 that turned into $380 over that short period of time.  

As mentioned earlier, many traders adjust the time frame they focus on based on what the market is dishing out. Is it a strong period? Patterns flowing through their stages on higher time frame charts or is it volatile?

One of the key factors of chart reading is for the chart to tell you a story about price.  You come to understand previous highs, lows, general trends, tough areas to get through, ceilings, floors, and previous gathering spots.  The same patterns that form on one time frame chart form and play out in the same way on shorter time frame charts.  It just takes more or less time based on the specific time frame chart.

My goal is to teach everyday people how to trade options, to learn to read charts, and while they are learning, they can participte in a program like ALPHA that trades the daily charts of equities like Oracle (ORCL).  I think of this as an earn-while-you-learn program that is perfectly suited for people who are interested in learning to trade options as well as have the opportunity to earn a profit as part of the learning process.


Contact FFR Trading today to speak to Wendy to discuss this further.


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