For those who like to trade in the energy markets the last few weeks have been marked by one word: volatility. With 4 or 5 percent daily moves, and even larger intraday ranges, commonplace in oil futures it has been a period that, depending on your outlook and results, could be viewed as either terrifying or exhilarating. Despite that, most traders understand that volatility is ultimately your friend. Without movement there is no opportunity, and without opportunity there is no profit.
As welcome as volatility is, though, it can be an account killer to those unaware of how to handle it. During a long career in foreign exchange dealing rooms around the world I experienced extreme volatility many times and, almost without consciously doing so, developed a set of rules for dealing with it. As violent swings in WTI futures look to be set in for a while it is worth laying those rules out here.
Rule #1: Forget Your Long Term View
Most traders, and I am no exception, like to trade with a bias. That doesn’t mean that I start every day with the same position. It just means that I am aware of the big picture influences of whatever I trade and, based on those fundamental factors, have an overarching, long term view. Right now, for example, I believe that this run up in oil will be short lived and that we need to test the lows again before a real recovery can take place. There is still oversupply, there are still worries about growth…essentially nothing…