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Volatility Trading : Why ?

Over the last 10 years financial markets went through several changes and, as a consequence, many different trading techniques that were considered to be extremely efficient and profitable are now generating increasing losses.

The financial downturn completely twisted the way investors and traders look at markets and many analysts, mathematicians, econometricians and portfolio managers are talking about a new market paradigm.

In other words, nothing will be like it used to.

In my opinion, we will get back to “normal” trading conditions in terms of psychological approach to risk  in a 3-5 years time.

The reality is that the markets are not going to trend as fluently as they used to. Retracements, pull backs and temporary drops will occur more frequently and more violently. The old strategies cannot cope with that any more because the sub-structure of the market is not the same anymore.

Think of it. It’s like driving a car. Let’s assume we have 2 cars: the 1st one designed and constructed in the 1920 and the second one in the 2010.  Are they similar?  Breaks, gears and the steering wheel are still going to be there but the way you drive itwill be different. You can measure the speed more accurately, you can drive faster , you have much more technology there and the same thing happens in the market. You cannot win the competition with an old car. You can try but you will be inevitably left behind.

Volatility is the answer to the modern investment ‘s needs. As time goes by financial markets become more and more volatile so why not trading volatility considering it as an asset?

Financial press continuously states that volatility is increasing in the markets. So, why not taking advantage of it ?

As a matter of fact, just a restricted and well educated elite of traders know how to expertly profit from volatility changes over time. The truth is that volatility trading is DIFFICULT !!! It is not as easy as it might seem and many readings and lots of effort is required in order to gain an edge over the crowd.

The good side of it is that VOLATILITY TRADING IS PROFITABLE !!!

Markets will experience wider swings and sharper retracements which old-fashion techniques will not be able to capture anymore and therefore we have to update our knowledge to surf  those waves rather than being overcome by events.

There are many ways to trade volatility and, if correctly  interpreted, some volatility technical indicators can prove quite useful. However,  many researches demonstrated that when measuring volatility some mathematical models and econometric techniques outperform all the others in terms of accuracy.

Consequently, the more we know the better because more accurate forecasts will inevitably lead to more profitable trades.

So, Why would anyone trade volatility?   the answer is simple: IT WORKS !!!

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