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Adjusting To The New Reality In Oil Markets

After a period of quite literally unprecedented volatility in oil markets, things seem to have calmed down a bit over the last month or so. July WTI futures (CLN20) have recovered nicely from the $6.50 low and are now trading back in the thirties, but remember, upward movement is still volatility. If it weren’t for the dramatic collapse, would anyone consider a 300%+ jump in a month to be a “quiet” market?

Of course not. So, while it may seem like the worst is behind us, it is still a good time to consider the adjustments that traders should make when dealing with volatility.

In my nearly twenty years in dealing rooms around the world, I traded through multiple booms and busts and more black Mondays, Wednesdays and Fridays than I can remember. I survived because early on I was surrounded by veterans who had already seen it all, and who gave advice freely on running positions in volatile markets.

That advice started with the most basic thing of all…adjust to volatility.

Most traders, both institutional and individual, find a strategy and style that works for them and then stick to it. That is generally a good thing, but when the nature of the market you are trading in changes it often negates that strategy. For example, I am, by training and nature, drawn to contrarian trades, always looking to “buy low and sell high”. As volatility increases though, pivot points, whether based on fundamental or technical analysis,…

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