Emotion Breeds Volatility

In the past month we have seen all-time highs for stock indexes and endured a historic correction. Though extreme movements are unpredictable and scary, they teach us humility and respect. When emotions run high, severe up and down moves occur. Markets take no prisoners.

During extraordinary price movement a trader must adapt. Risk and profit targets need to expand. For example, shortly before the S&P topped out an average day range was about 23 points. During the past week that average day range has jumped about twice the norm or 45 points. Let’s say a speculator normally risks 25% of an average day range and targets 75% of a day range as a profit target. When volatility is high that trader would likely be stopped out of a trade because the risk level is too tight. Also, that trader may leave a lot of money on the table due to taking profits too early.

When volatility jumps be sure to recalculate your targets for risk and reward. A 20-day average is a good benchmark. Updating these numbers every three days should keep you current and allow you to maximize profit and minimize risk.

Below are the recent average day ranges for the most volatile markets during this extraordinary time. 

John Seguin, Market Taker Mentoring

Trader Education