Volatility anyone?

Published on 4 February 2021 at 13:36

In the world of trading, there is only one thing that really matters. You need volatility to make money.


When you are new to trading and are searching for an edge to exploit, you need to consider how your edge behaves in real-life action. Many, many maybe even too many people turn to software that can do backtests of an idea that you can see on a chart with price or even with some indicators. To only discover it doesn’t work in real life. One of those reasons why it doesn’t work in real life is volatility or even more precisely: the lack of volatility.


The same setup under a different volatility environment gives a very different result. 

Too much volatility and it is prone to whipsaw, too less volatility and you have no real profit in your trades. Reading the action at the moment and especially how volatility behaves is one of the keys to being a profitable trader.


How do you measure volatility?

You need two components: Speed and distance. The faster your underlying is moving and the bigger the range it travels while moving, the higher the volatility.

You can see it only in action, it is hard to see it in a time-based chart after the fact. That is why I like a range bar chart or tick chart, you can see the timestamps and the distance the underlying traveled in that kind of chart.


All new to you? Put some tick or range bar chart and watch it live. You will see fast enough what I’m talking about.

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