The impact of volatility on the performance of traders

The impact of volatility on the performance of traders

The impact of volatility on the performance of traders

Do traders perform better when the markets are on the move, or when they are calm? We’ve researched over 10,000 independent traders to uncover trends when volatility is high and when volatility isn’t.

What happens in high volatility?

When volatility is high, independent traders flock to the markets in droves looking for winners and chasing the excitement. Many traders can do very well in times of low volatility, but this is not always the case.

Fear of missing out can drive impulsive or risky decisions, which could negatively affect performance, such as when GameStop (GME) stock exploded earlier this year.

In 2021 so far there have been 4 trading days where volatility closed above 30, all at the end of January when Reddit traders attacked hedge funds. Since then we have seen much more modest levels of around 15-20.

Trading volumes tend to drop when volatility is lower. Many traders stay out of the markets, waiting for more movement. But we think low volatility brand trading times are less risky, and therefore are a great time to work on trading plans, disciplining and using slower markets to make better decisions.

Do traders do better with high volatility or low volatility?

We analyzed over 10,000 independent traders, comparing their performance on high volatility days to low volatility days to glean some insights into their behavior.

Traders perform better by 21% when volatility is not high (below 30).

Source: , Stone X

We also found that 41% of traders have an advantage with high volatility and behave differently in volatile conditions.

They have larger profitable positions, while their losing trades remain the same. They can therefore maintain risk when volatility is high, while taking advantage of larger moves to capture higher returns.

Others are doing less well. These traders have lost smaller winners – they find it more difficult to stay in profitable positions long enough to capture the upside. At the same time, their losing trades get bigger as they fail to change their positions to take the additional volatility into account.

performance traders volatility losses
Source: , Stone X

Overall, greater volatility on large winning trades is more difficult for less experienced traders, which hurts their performance.

Why do traders perform better when volatility is not high?

For newbies, high volatility might actually be the worst time to start trading. A really strong start – which could just be luck – can lead to more confidence, and a really bad day can destroy a new trader’s account before they’ve had a chance to really get to grips with the business. negotiation.

Additionally, the high volatility can cause a number of behavioral biases to come into play that can negatively impact performance:

Herd instinct

The pack instinct is where traders make decisions based on what they think other traders are doing instead of doing their own analysis, assuming other traders have done their research.

When enough traders have adopted this way of thinking, bubbles can form and inexperienced traders cannot be equipped to handle new market conditions. We saw what is happening earlier this year on the stock market with the stock GameStop (GME).

Loss aversion

Loss aversion causes irrational behavior among traders. Humans experience losses more severely than equivalent gains. So when a market is volatile, traders perceive the losses to be worse than the gains, even if they are the same. Then they start making impulsive and irrational decisions to avoid another loss.


Fear of running out (fomo) exacerbates emotions when volatility is high, making the odds of irrational trades more likely. Traders are afraid that they will miss out on a great market opportunity, so ignore their trading plans and make higher levels of risky trades.

As Warren Buffet said, “Be fearful when people are greedy, and greedy when people are fearful. “FOMO” traders do the exact opposite, causing panic buying and then panic selling.

How does volatility affect your trading?

It is important to know how the volatility effects your performance, so that you can protect your weaknesses and play to your strengths.

For example, if low volatility makes you worried and bored, it can lead to over-trading. Or if high volatility gets you stressed, you start to oversize your trades.

On the other hand, if low volatility helps you stay calm, you can gain valuable experience trading with discipline in slower markets. Or high volatility could allow your trades to deliver within a time frame that works best for you.

You just need to make sure that you know what type of trader you are.

Performs well Performs poorly
High Volatility Energized Excited
Low volatility Control Bored

What can traders do?

Each trader should understand their own strengths and weaknesses in different market conditions.

During quieter times, lower stress levels can benefit less experienced traders, making this a great time to practice discipline and good risk management.

When trading in fast moving markets, it is important to limit the big losing outlier trades that contribute hugely to losses.

Typically, if there is a day of high volatility in the markets, the next day is 89% likely to be very volatile as well. It is important. Don’t sit outside on a busy day and expect the markets to calm down quickly, as history has shown this to be the case.

In contrast, a day of average volatility (10 – 30 on the VIX) will be followed by another day of average 98.6% of the time. It is therefore also important not to anticipate high volatility that does not materialize.

index barely 2021
Source: , Stone X

Some other interesting facts:

  • High volatility days are more likely to be bearish days on the S&P (54% DOWN)
  • When volatility is below 30, the S&P is more likely to be up (56%)
  • Days of very low volatility (less than 10) are more likely to be Fridays and more likely to be December
  • Days with high volatility (above 30) are more likely to be Tuesdays and more likely to be October

Market volatility affects the performance of traders. Usually traders perform better when volatility is not high, although some experienced traders can profit from larger moves. So identify if volatility is a strength or a weakness for you and adjust your trading strategy accordingly.

Open a demo account to build your trading strategy in a risk-free environment.

By » Official site

Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or a solicitation to buy or sell forex foreign exchange contracts or CFDs. Although the information contained in this document has been taken from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages that may arise from the fact that someone relies on such information.

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