Volatility, Trends, Expected Move and Risk

[toucan]

I have been daytrading futures for 13 years.

I am a trend trader and analyze volatility, trends, expected move and risk every Friday after the close. My analysis tends to end up with percentages, averages, probabilities and ranges. Traders can have different definitions for volatility, trend, expected move and risk, so I will try to define them as I go.

Volatility is the distance that price moves over some time period. For emini futures I tend to trade the first 2 hours after the equities open. So my volatility calculation is based on the price move over those 2 hours. The price move over those 2 hours has 2 components, trends and chop. I focus on the trends. My definition of a trend is a price move in one direction from the trend start to when price retraces against the trend more than my initial stoploss. I analyze those trends and calculate the average percent of trends that move more than 2 times my initial stoploss. For example, over the 2 hour time period that I trade the emini, 38% of the trends moved more than 2 times my initial stoploss. For those 38% of trends, my initial stoploss is 3.7 points and my expected move is 3.1 to 4.2 times my initial stoploss. This is just an historical example and will change over time.

During the trading day when I add support/resistance and market context, I can raise that win/loss ratio from 38% to over 50% for the actual trades that I take and achieve a minimum of 2:1 profit/loss ratio. These are averages and i have losing trades and losing days like any other trader.

Risk management for me is determining the amount of dollar loss per trade that I am willing to risk using 1 contract. If using 1 contract puts me over my maximum dollar risk, then I will not trade that future during the next week. If using 1 contract is less than my maximum dollar risk, then I will add contracts to raise my risk up closer to my maximum dollar risk.


SO… MY QUESTION TO OTHERS IS: HOW DO YOU TAKE VOLATILITY, TRENDS, EXPECTED MOVE AND RISK INTO ACCOUNT IN YOUR TRADING.

toucan

 

[traider]

What is market context? Do you mean whether bullish neutral or bearish? How do you predict that?

 

[KCalhoun]

I like your focus on first 2 hours, and the differentiation between trend and chop as a way of looking at volatility, that's very smart.

Similar to es, I follow SPY closely premkt to gauge volatility, on a 2-day chart so that I can see pre-market gap trend strength and whether or not it is opening up inside the prior day's range or above or below it. worst volatility is if the spy is grinding sideways in the middle of the previous day's trading range.

Best volatility is a small gap above prior day's hi that trends upwards between 9 a.m. and 9:30 a.m. that influences my decisions regarding share size, likely duration of the trade etc as a function of spy volatility.

 

[danielc1]

I also only trade the open. I need volatility to make money. I try to catch the turn of the opening session for a 2 to 1 risk or for a 5 to 1, depending if the turn is in the direction of the trend of the previous day(s). I use MP for determine the turn points. I use delta to see if it turns on those levels. It is simple, stress free trading.

 

[toucan]

What is market context? Do you mean whether bullish neutral or bearish? How do you predict that?

i am a daytrader so i look at where price is, time and important events.

where price is in relation to: high/low of today, high/low of yesterday, the current trend, high/low of range prior to the start of the trading day and current atr versus average atr for the time period that i trade. i trade 8 currencies, 3 metals and 4 indexes, so i also look at how/where price is moving for other futures in each of these catagories.

what time is it and important events like: todays news reports, increase in trade volume (this is not contract volume, but trades), open/close for usa and european markets... if trading crude, then the wed crude report and for some reason 6am pst moves. if trading natty, then the thurs natty report. any times or events that may move the futures that i trade. this is when i believe good trade volume occurs.

i suspect that i look at more that what i have listed above and not everything works every time, but all that is needed is to be aware of where price is, time and events.

toucan