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Volatility: traders' tales

Created:

7 March 2008

Written by:

Richard Hemming

In our main feature, we outlined how traders can use market volatility to their advantage. Here, seven trading experts share their views and experience on how to go about doing that.

ROY MITCHELL

Roy Mitchell's trading strategy has various levels of complexity but one involves trading the hedge-fund manager Man Group, a former employer. "I recommend that people focus on one share because it means you get to understand its trading ranges," he says. The volatility of the company's share price gives him ample trading opportunities.

He doesn't use charts, but studies the Level 2 order book to check the level of interest from buyers and sellers.

The current volatility has made him more wary of holding positions for any length of time: "My trading strategy is more rigid, but I'm doing exactly the same thing. I'm not being greedy at all. Once I make £500 or so, I'll get out without thinking about it. I do a lot of smaller trades, because I don't trust the market. Of course, this means I can miss out on some big moves."

CHRIS HOLDEN

Although Chris Holden has been trading for the past 14 years, this is his first year trading full time. He's found that the increase in volatility has made it harder to fill his orders when trading on the internet. He aims to obtain £60,000-worth of a company's shares.

"Market makers are reducing the availability of shares online to cover themselves because the stocks are moving so quickly either way," he says. To combat this, Mr Holden plans to use direct market access for trading CFDs, instead of buying shares directly. This means he can put his own orders in of the quantity of his choice. Trades via direct market access cost more. Mr Holden says that he believes he can recoup money because the prices he obtains will be better, enabling him to make more money per trade.

GRAEME DICKSON

The legacy of Graeme Dickson's nine years trading the market is humility. "You can't fight the market, or the price action. Let the price determine your actions," he says.

In the back half of last year, the market looked expensive at times, he says, and it was tempting to short – or sell stocks in the hope of buying them back more cheaply. But doing so would have cost a lot of money because the market kept going up, day after day. The key, he says, is to go with the momentum. If it's a bullish market, look for buying opportunities.

Confidence is also a fickle thing, he says. Although he has made a great deal of money from certain trades, he has lost "twice as much" from betting too much on a stock such as Rio Tinto, only to watch it collapse. In such situations, he cuts his losing trade as soon as he can, and moves on.

CLEM CHAMBERS, CHIEF EXECUTIVE, ADVFN

For every successful trader Clem Chambers has come across, he has seen 99 that fail. He says this is because they don't have a system. "If you are going to be a trader, you need a confoundable edge, a provable edge. The majority have no idea and live in a fantasy and, of course, lose all their money."

Trading is about throwing large amounts of money at a deal in order to make a small amount. In times like this, it is important to take as short term a position as possible, he says (this is the strategy of Roy Mitchell and Chris Holden). Traders call this scalping and it involves trying to pick the short-term swings or directions of a security.

TIM HUGHES, HEAD OF SALES TRADING, IG INDEX

After years of watching markets, Tim Hughes says that volatility is high at the moment, but it has peaked at these levels a number of times over the past 15 years. It is positive for traders now, allowing them to take advantage of larger-than-normal moves in the share prices of big companies.

But if the volatility continues, it could have a detrimental effect, lowering confidence in the markets: "Unlimited volatility at some point ceases to represent a trading opportunity and starts to represent chaos."

Mr Hughes also makes the point that volatility has led to some declines in the share prices of smaller-cap companies, whose stocks are harder to get into and out of because of the lower number of buyers and sellers.

MICHAEL WRIGHT, DIRECTOR, BETONMARKETS.COM

Michael Wright's company, Betonmarkets.com, has an innovative system that enables people to potentially profit from the current volatility. The company provides fixed-odds betting opportunities on FTSE movements within a certain period. The odds given by Betonmarkets are derived using the Black-Scholes option pricing model.

At the time of writing, the Dow Jones Industrial Average index was at 12345. If you bet that it will touch either 11800 or 12435 in the next 30 days, the return would be 38 per cent. "With all this volatility, both these barriers have been touched in the past 30 days, so it's a popular trade," says Mr Wright.

DARREN SINDEN, SALES TRADING, LITE FINANCIAL

Darren Sinden's biggest tip for investors in wildly fluctuating markets is to be nimble. This is particularly advisable when shorting, where a security is sold on the expectation of buying it back at a lower price. "The only thing to say about shorts is that you have to be relatively fleet of foot. You don't want to go to lunch if you are shorting, because things move quickly," he says.

Shorting in general is dangerous because losses are theoretically unlimited. For traders looking for less risk, it is a wise idea in bear markets to look for oversold securities and try to buy them during a "bounce".

Whichever strategy is adopted, the ability to move quickly is the way to make money in these markets, according to Mr Sinden.

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