*Trading Volatility across the release of this months Non-Farm Payrolls data release*
Welcome back to the blog. I am pretty busy this week so I only plan to write 2 blog posts but if I get time I may squeeze in a 3rd on Friday. In this blog post I am going to talk you through a slightly more obscure trade that I took last week on a financial instrument that few of you might trade but many of you should now know about.
The Trading Market Volatility series has been introduced to my blog over the past few weeks and this is technically the 4th and FINAL instalment. Trading volatility is not like trading FX or stocks because you are not buying or selling something of intrinsic value, you are trading a custom created index that is based on a measure of volatility in the stock market. This index has no real world value and is not derived from/can not be converted in to any asset.
If you are interested in learning to trade market volatility then please click on the links below to read the previous 3 blog posts in my Trading Market Volatility series.
Let’s get right in to it and look at the pre-trade chart set up for my trade on the Volatility Index (VIX) – April 2020 futures contracts.
Unfortunately I am using a new broker and charting system to trade these specific VIX futures contracts and the charting software is not as easy to use as my normal one. However, you can see on the pre-trade chart shown above that VIX was trending bearishly through the few hours leading up to the NFP data release on Friday.
Lower highs and lower lows are visible and the price of VIX futures began to pullback around 1hr before my entry. I entered my short position at 13:15pm which is 15 minutes prior to the actual data release. I do this for 2 reasons.
- Spread fees tend to increase the nearer you get to high impact news due to the expected volatility. It is cheaper to enter a trade position 15 minutes prior vs 5 minutes prior.
- This gives me enough to to get in to a trade, manage my exposure and set my exit plan before the high impact news is released.
The chart below shows the VIX April 2020 futures around 30 minutes after my trade entry. You can see the full details for the short position at the bottom of the screen including open/close times, prices and returns.
I shorted the VIX April futures with an execution price of 47.367 which was just below the 5 minute candle closure price of 47.500. This was due to spread that I did not get the perfect entry and this is a simple cost of trading. I had a plan to exit the trade approximately 0.5 points above my entry price and placed a red line on the chart where I planned to exit which was 2x SL size to produce a reward:risk return of 2R.
I did not place a stop loss or take profit order on this because I knew the trade was going to be extremely short duration and I would be watching the charts at my desk the whole time. There is potential to use orders for this trading but I am yet to experiment and test their accuracy on this financial instrument.
You can see the trade entry and exit times, entry and exit price and total final return value at the bottom of the image above. It is as close to 2R return as I could get considering the spread fees and manual entry and exit of the positions.
Friday 3rd April 2020 NFP Data Release.
According to analysts, the forecasts for non farm payrolls was to be a change of -100k (negative 100,000). This is a decrease in employment of 100,000. The actual result was -701k.
This is the worst monthly employment figure since the financial crisis in 2008.
The chart below shows the VIX April 2020 futures at the daily market close on Friday 3rd April.
Another method of profit taking that I have been investigating is actually holding the short position through to just before the market close. I have been looking at past trading examples and it appears that over a longer period of trades, returns are increased despite the win rate of trades decreasing. This is because the reward:risk ratio of holding trades through to market close produces up to 3x the returns of the standard trade exit method that I have been practicing so far.
You will see on the chart above that the price of VIX futures went on to make a new lower high on Friday afternoon before selling off and going way beyond my trade exit. Waiting until just before the Friday market close would have turned this 2:1 RR trade in to a 4:1 RR trade.
This is a good example of why it is very important to live test and record as much data as possible when developing a new trading strategy. Knowledge is power and you can never have too much data when trying to analyse the success of a trading strategy.
Trading market volatility is NOT for everyone. You must understand that it does not follow the same market fundamental rules as FX, commodities or stocks and the risk management and position sizing calculations are different.
That being said, it can be highly profitable! In late February 2020 when the stock markets began to sell-off in spectacular fashion, the VIX began to climb fast! The chart below shows this.
Whilst the S&P500 index dropped by over 30%, the VIX volatility index gained over 500% in value! That is how powerful trading market volatility can be.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
FTMO Trader Funding Programme.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.