Why Volatility is a Trader's Friend
Posted on October 11, 2019
I hope you had a great week! Today’s post will be briefer than usual, largely because there isn't much new to add beyond what I have shared here in the past couple of weeks. It's not merely a product of the markets being quiet however. Our Checklists have once again helped us to anticipate the right side of the trade to be on ahead of time, and the market has presented the necessary setups for us to capitalise on this by trading against the under-informed consensus, as I have shared with Trading Club members in our recent weekly videos.
Right now there seems to be a lot of political noise and event risk out there, which can make it challenging for fundamentals to be fully translated in the price. For some this might sound as though applying a fundamental process is futile, but rest assured that as an experienced investor, I see this more as an opportunity to position for the eventual move when rationality returns.
Crude oil provides a great example of this. Take the recent move on the 16th of September where crude gapped up almost 10% on news of a drone strike disrupting supply at one of the world’s largest refineries. Novices may have looked at this and assumed that oil was destined to surge higher following the breakout above $60, having ended the previous session below $55. But looking to the fundamentals represented in our Checklist, it was clear that - save for this emotionally traded ‘tape bomb’ - on balance we should expect to see downward pressure on crude.
Here you can see how this played out following the emotional buying that saw the market spike to as high as $63 intraday, before fading more than $10 below $53 as the smart money took over...
Don’t get me wrong, there’s no ‘free lunch’ in investing, especially when trading crude oil which is notoriously challenging. However, there is no reason why you shouldn’t embrace volatility (price moving in the opposite direction to your fundamental bias) when following your process. There’s nothing more frustrating than having a clear view on a market, only to see price has already moved significantly in that same direction… so when your process and price contradict each other (only at the extremes), you are very often presented with a great setup.
Like always, with the psychological aspect of taking risk it's easier said than done, but we’re here to help you every step of the way. We provide our Checklists for a range of markets at the Trading Club and update them for our members on a monthly basis with video updates each week tracking the evolution in markets.
If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then contact us today and take your financial knowledge to the next level right away!
Have a great weekend,
James Helliwell | Chief Investment Strategist
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