How to trade these volatile markets

Published on: February 08, 2018

It’s been an interesting few days in the financial press. No-one’s able to predict anything there but they sure do like to point out the ’causes after the fact.

On one outlets, in one day after the drop, headlines were along the lines of

• The sky is falling
• How to buy a bottom
• Markets fail to recover
• Ahhh, we don’t know – it’s just moving a lot

Liquidity aka Market Depth on Thursday was down to less than 100 each side on the S&P 500 futures and in some cases just 10 or 20. So a single buy order for 100 lots was able to move the market 5-6 ticks all in one go. That’s very different behavior than we normally see.

So how to trade it? How to take advantage of this extreme volatility?

Simple – you don’t. There’s a simple reason why not…

If you trade a market and it becomes really volatile, the conditions have changed. It’s simply not the same market any more. It’s ‘personality’ has changed.

If you were the sort of trader that traded really volatile markets, you’d be trading DAX, SPI, Nasdaq Futures. The sort of action we’ve seen on the S&P over the past few days is similar to how they normally trade.

If you aren’t trading those conditions day in day out, chances are you will not fare well on an ultra-volatile S&P.

For beginners, trying to learn the nuances of order flow – spend a few days away from the S&P500 – maybe move to looking at currency futures or grains – great markets with good liquidity & good action.

When the liquidity comes back into the S&P – where we are seeing 4-500 contracts per level on the DOM, then it’ll be back to normal. Even then, do expect the market to be quite nervous and for us to put in sudden moves either way. It will return to normal – just don’t expect it to be an on/off thing.