Market volatility is the wind beneath most traders’ wings. Without it, stocks tend to move within a relatively narrow range, limiting one’s profit potential. Yet many traders find themselves operating in just such conditions today.
The Cboe Volatility Index®—the most widely cited measure of market instability—has for the past five years been reading well below its 27-year average, and in November 2017 closed at its lowest level ever (see “Lying low,” below).
Among the myriad reasons for the market’s muted volatility are historically low interest rates, steady economic growth and the rise of exchange-traded funds, which are generally less erratic than individual equities and represent a much larger portion of investor assets than they did just a decade ago.
So what’s a trader to do? Here are four tactics tailored to today’s low-volatility environment.
1. Take smaller wins
It can take longer than usual to reach your price target during periods of low volatility—which can be a bitter pill to swallow for those of us who like to trade very actively. One potential solution is to sell your winning positions in bits and pieces. If a trade moves against you, you’ll have already realized some profit, whereas if it keeps moving in your favor, you’ll still have some skin in the game. Remember: Smaller wins are still wins.
2. Try new tools
Trading success often comes down to the prices at which you set your bracket orders—that is, your uppermost and lowermost price limits for each trade. When prices are swinging dramatically, you need to set wider guardrails in order to avoid being closed out of your position prematurely. But when volatility is low, those guardrails may be set too wide to realize smaller wins.
To rightsize your trading band for current conditions, consider basing your brackets on the average true range (ATR), or the average daily difference between a stock’s high and low prices over a select period of time. Should a stock’s ATR become too narrow to make even a minor profit, consider screening it out and redeploying your trading capital elsewhere.
3. Follow the familiar
Even if volatility on the whole is low, some areas of the market may still experience big price movements. However, dabbling in unfamiliar territory can make it harder to discern whether a stock’s erratic behavior is the result of natural, cyclical price movements or a sign of broader trouble.
Instead, stick with what you know. Most of us are familiar enough with at least a handful of stocks to understand what influences their prices, and profit opportunities may still exist even if the stocks don’t move like they used to. Plus, when volatility does return, you won’t have thrown away your capital on a few risky trades.
4. Reset your expectations
Satisfaction in trading is largely tied to how well you manage expectations. If you’re constantly judging your performance against past successes, you’re likely to be disappointed.
That’s why it’s so important to adjust your outlook in a climate of low instability. Rather than dwelling on what might have been, focus instead on setting realistic goals and taking profits—however small—as they come.