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Trading In Volatile Markets
By Craig Turner

Trading in volatile markets provides extraordinary opportunities but it also carries more risk. For more aggressive traders, volatile markets can lead to larger than normal losses, but they can also provide rare opportunities that can be highly advantageous for your trading account. If you are going to trade in volatile markets, or if you have positions and the markets become volatile, you need to know how to recognize the warning signs and navigate through the storm. You have to be able to manage risk if you want to take advantage of substantial price moves.


1) Margins are inadequate guidelines in volatile markets

When a market is volatile, the first thing you should do is make sure the margin requirements are greater than the daily ranges in the market. For example, when Silver was trading from $20 to $50, the exchange and clearing firms did not raise margins. Anyone who has traded silver knows it can trade down 10% on its worst days. In my opinion, margins should be at least a day's trading range for any contract. When Silver traded at $15 and $20, the biggest down days would be $1.50 to $2.00. Margin for silver would be around $10,000 ($2.00 in the big contract). This was appropriate for the contract.

Looking back, there was a big warning sign the Silver market could become a volatile market. The red flag was the exchanges and clearing firms not raising margins as Silver traded to $30 and then $40. As the market climbed higher, the daily trading range was higher. Margins stayed the same. This meant that it was possible that too many traders were in the market without enough capital, which is always a recipe for volatility.

If you are trading a volatile bull or bear market, you need to use the possible daily trading ranges as a guideline for capital. Exchanges and clearing firms are slow to act. They are rarely ahead of the curve on margin issues, and they are usually caught off guard and have to increase margins after the damage is done.

By understanding that you need more capital on hand to trade volatile margins, you will have more staying power than the average trader. The trader using margin as a guideline will not be able to stay in the position. A trader who understands that volatile markets can have higher trading ranges than the exchange margin should be able to ride out the storm better.