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Day Trading a Volatile Market

So far in 2022 we've seen extreme amounts of volatility in a very short amount of time. January saw a huge drop in price across all markets, including but not limited to stocks, futures, crypto etc. etc. The questions is, how do traders safely trade these types of conditions, where we can see price jump 100 + points on the ES in a few minutes?

The answer to the question above is not a simple answer. We will need to break it down info a few different parts. First off traders need to reduce there risk, when the market is making huge swings you need to trade accordingly. Our view on this is to reduce risk, but what do we really mean when we saw reduce risk?

When you see the words" reduce risk", the first thing you should think about is your contract size. For example if you are trading with 4 contracts, drop down to 2 or maybe even one. Now you might saw to your self" I'm going to be making less" and you would be correct and we will address that is just a moment.

The idea here is to drop your risk by potentially increasing your stop size. The reason being is you are still risking less but allowing your trade to have a great amount of room to work out. For example if you trade with 4 ES contracts with a 4 point stop, you are risking $800 ( 1 contract = $50 per point x 4 = $200 x 4 points = $800). Now a 4 point stop could be a bit tight when we are seeing price move 20-50 points in a few minutes.

Instead traders could drop there stop loss down to 8 points and trade one contract. there risk would now be $400, half of what it was. This gives you trade more room to move, you risk less and there could be a better possibly of your trading working out.

Now we get to the second part, setting your take profit target. For example our trader above used a 4 point stoploss, we are going to use a 4 point take profit target as well or a 1:1 ( Risk:Reward). When a market is making huge moves in one direction of another it would be smart to take advantage of this type of movement.

This is normally done by increasing your take profit target. Instead of shooting for 4 points, maybe shoot for 10 or 15 points. A 10 point trade with 1 ES contract would be worth $500 a 15 point trade would be worth $750.

Now it might not be the exact amount you were making when the ES was only moving 20-30 points a day. You are now risking less money and being more accommodating to the current market conditions and that is all we can do as traders. Adapt and move on.

Lastly is, picking strong levels. Now when prices gets move extremely fast in one direction or another many traders are hit with FOMO. This causes trades to jump in, in the middle of the move. Since price is move so fast and being so volatile this leads to the trader getting stopped out even though his/her direction was correct.

Instead traders need to focus on the big levels, when we say big levels we mean areas of major support and resistance. See part 8 in the price action course for more information. For those of you who are not yet members here is a link to gain access.

By focusing on major levels of support & resistance, traders will hopefully be able to avoid getting stopped out when they have the direction correct.

These are just a few tips we like to use when volatility picks up, be sure to go and back test them before implementing them.


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