Correct perspective on trading strategies based on volatility

Volatility (market fluctuations) is an important factor in trading. When volatility is high, the opportunities to aim for large profits also increase, but so does the risk. Conversely, when volatility is low, trading can be more stable, but there may be fewer chances for substantial gains. Here, we explain the correct perspective when building a volatility-based trading strategy.

1. Correct methods for measuring volatility

It is important to use tools and indicators that accurately measure volatility. Representative ones include the following:

ATR (Average True Range):An indicator that shows the average range of price movement over a certain period.
Bollinger Bands:Bands placed above and below the moving average that visually show the price's range of movement.
VIX Index:An index that measures volatility of S&P 500 options, often referred to as the fear index for the overall market.

Using these indicators to quantitatively understand market volatility is the first step.

2. Entry strategies according to volatility

When volatility is high, large fluctuations are expected, so the following strategies are advisable:

Set stop losses:When volatility is high, set tighter stop losses to cope with unexpected price movements.
Adjust position size:When volatility is high, it is prudent to reduce position size for risk management.

When volatility is low, strategies that follow stable trends are effective:

Trend following:A strategy that follows price movement in a certain direction; in low volatility environments, trends tend to persist, making this effective.
Range-bound strategy:If price moves within a certain range, trade within that range.

3. Psychology and risk management

Trading based on volatility also heavily involves psychology and risk management.

Make a plan:Prepare in advance a trading plan for each scenario—high volatility and low volatility.
Do not be swayed by emotions:Emotions can be easily unsettled during high volatility, but maintaining calm judgment is key to success.
Be consistent:Maintain consistency in your strategy and adhere to the rules to achieve long-term success.

4. Rules for assessing market volatility

Finally, set your own volatility criteria and establish rules for judging entries based on them.

Set specific criteria: for example, enter when ATR exceeds a certain value, or refrain from trading when the VIX is above a threshold.

Test the rules:Backtest the rules on historical data to see if they are actually effective, and adjust as needed.

Trading always involves risk, and no perfect strategy exists. However, by correctly understanding volatility and building strategies based on it, you can maximize profits while managing risk.