Have you ever asked yourself why your trading system performs so well some of the time, but then fails other times? Many traders mistakenly believe then that their system somehow has stopped working which eventually leads to wrong assumptions and decisions.

However, the main reason for seeing inconsistent trading results is that most traders don’t adapt to changing market conditions. Financial markets are always changing and things like volatility and momentum fluctuate a lot which makes it necessary for your trading method to adapt to those changing conditions.

Why do you have to be aware of volatility?

Excursion: Volatility describes how much price fluctuates. In a high volatility market, price moves back and forth a lot and candles usually have relatively large wicks.

It is important to keep track of volatility for mainly two reasons:

(1) First, your stop placement has to adapt to changing volatility; during low volatility times, you can (and should) use a smaller stop loss because price does not swing as much and a stop loss that is too wide would reduce your reward:risk ratio unnecessarily. On the other hand, when volatility is high, you should use wider stops to avoid getting whipsawed.

(2) Second, volatility impacts the way you should set your profit targets. During high volatility times, you can use a wider profit and capture wider market swings and when volatility is low you should use a smaller profit target so that price does not turn ahead of your target.

Volatility in the Forex market

The time zone you live in and your daily schedule have big impacts on the currency pairs that are best suited for your trading – especially if you are a day-trader. Forex pairs are typically most active in the specific trading sessions of their own country. For example, the EUR/USD is most active during the opening times of the European (Frankfurt and London) and American (New York) stock market; the EUR/JPY is most active during the European and Asian trading session, and the USD/CAD is most volatile during the New York session.

Volatility in the stock market

The stock market is different from the Forex market and since trading times are limited, volatility impacts price movements in different ways. When trading stocks you can usually find two volatility peaks per day: the first peak occurs after the morning open of the stock market and the other one in the afternoon, usually after the lunch break.

News and more

Of course, pre and post news times, times of uncertainty and macro events can also have huge impacts on price volatility and it always pays off to be aware of how volatility and momentum are currently behaving.

Setting up Edgewonk to analyze volatility and time of day

In Edgewonk, there are 3 ways in which you can track, analyze and tweak your trading based on volatility and time of day:

1 – Setting up a Custom Statistic

First, you have to set up a new Custom Statistic. If you are a Forex trader, it makes sense to tag your trades based on the different Forex trading sessions. As a stock trader, you could create tags for “market open”, “pre-noon”, “post-noon” and “pre-market close”. You can also create a custom statistic that tracks ATR or VIX values.

2 – Improve and adapt with your order placement

Once you start tagging your trades based on time of day or with volatility indicators, you should then consult your Edgewonk Updraw and Drawdown statistics. These figures analyze your stop and take profit placement and show you how to stop giving back profits, how to increase the size of your winners and how to increase your winrate overall.

3 – Does volatility scare you?

With Edgework’s trade management analytics, you can see if you are making more mistakes during high volatility times. Some traders feel the urge to constantly move around their stop and profit orders during the duration of their trades. This often results in bigger than necessary losses and winners that could have been bigger. With the Edgewonk trade management analytics, you can see exactly when you are making mistakes and if you should stay away from high volatility or if you can handle it well.

It’s not important to get too fancy here and it usually is enough to focus on those three aspects when it comes to volatility and understands the impacts on your trading approach. Thus, we suggest setting up 1 Custom Statistic and start tagging your trades to find out if you could improve your trading.