A Volatility Retracement Trading Strategy

Last Updated on January 26, 2023 by Mark Ursell

This video and article shows you a volatility trading strategy that you can trade today. Take advantage of the best of both calm and volatile markets.

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Volatility Comes From Emotions

The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.

HP Lovecraft

Greed

Greed starts from normal confidence and optimism that things are going ok. It builds up slowly. Over time conquering the legendary ‘wall of worry’. As traders we collectively start to see dollars signs in everything, we imagine ourselves hitting the jackpot and driving six-figure cars.

Fear

Fear comes quickly. Sometimes it turns into panic. Occasionally into despair. As traders, we collectively become frantic, cornered animals desperate to escape from our trading positions.

Volatility Trading Strategy

Volatility should be a factor in your trading thinking. Whether you are avoiding volatility and trading calm markets or seeking volatility and looking for high returns.

Volatility Trading Strategy Rules

Long Trades

This trading strategy takes long trades when the market is rising AND volatility is low.

• The market is in a bull market. Identified by the 50 period EMA above the 200 period EMA.
• Volatility is low. Identified by the standard deviation of the past 20 days daily change.
• The market must have retraced. Closed lower than the previous low by at least a fixed percentage.

Short Trades

This strategy takes short trades when the market is falling AND volatility is high.

• The market is in a bear market. Identified by the 50 period EMA below the 200 period EMA.
• Volatility is high. Identified by the standard deviation of the past 20 days daily change.
• The market must have retraced. Closed higher than the previous low by at least a fixed percentage.