Last week I wrote about volatility being the trader's friend. Today I will further explain how volatility is used differently to your advantage in upward, horizontal and falling market trends.
So, let's clear up the table first.
Let us look first at what other vital factors come into play.
VOLATILITY vs. TRADING COSTS
Although I have so far avoided talking of the various trading fees & costs, you want to always allow for a number of commissions & fees in your trading decisions. As a minimum, the following classes of fees must be taken into consideration:
1) direct trade fees - you will pay for each buy and each sell transaction executed,
2) indirect trading fees - fees for storage and safekeeping of your digital assets and funds (cash, stable coins, etc.),
3) credit line running cost - if you trade with borrowed money, you pay a % for both readiness, and for the amounts actually used,
4) taxes - in most legal systems, a tax is paid on sales of any assets,
5) opportunity lost - if you engage your funds in activity A, you cannot do activity B (e.g. you cannot place your cash in a deposit),
6) etc. - (e.g. FX costs) - investigate, read online sources, ask the tax office of your country - if in doubt.
Ouch! Do I really have to pay all these? Very unfortunately so.
For this moment I will assume the sum of all the fees is 2%. Which is close to true for small deals in digital pseudo assets (BTC/ETC/etc) and for most deals in small amounts of gold, stocks and many other classes of assets. You will be able to trade at 1% fees - if you go big one day (trades bigger than USD 10k each, or thereabouts).
So : let us assume that on each buy&sell pair of trades you will pay 2% of fees total (1% on the buy trade, and a further 1% on the sale).
So ;-) if you are smart ass ;-) you know already that the price change in the period you deal with (a day, a week, a month, etc.) must be at least 2% to render the trade a profitable one.
A SIMPLIFIED, but realistic, EXAMPLE
Sunday night you have USD 100 in your pocket. You read something at PUBLISH0X (maybe something written by one Sergei Nemetz) and you decide trading is the job for you.
1) Monday morning you buy 100 tokens of X, at 1 USD apiece, pay USD 100, commision paid is 1 USD,
2) HODL ;-) HODL ;-) HODL;-),
3) Monday evening you sell the batch at 102 USD, commission paid again 1 USD.
102 - 2 = 100. You still have your USD 100. Bingo! You have just learned how to trade anything. And you have not lost a single dollar. Go now, and do not sin anymore.
BUT, if you are still here. Here is the rest of the story :
There are traps.
The first trap is that anything that costs X and goes up Y% then falls by the same Y% is no longer priced X (grab a calculator and check this). Neither does anything that drops Y% then goes up by the same Y% cost X anymore (no need to check, trust me, it does not).
This is to say you want to look at real dollar value of what you buy and sell, not just at % change.
The second trap is a bit more challenging. It goes like this: On a market going up (an uptrend) volatility of 2% may bring profit trades (well, if you catch the lows and sell the tops). But on a flat market (horizontal trend) it will just hardly do, and the same volatility of 2% on a falling trend will no longer cover your 2% trading costs - even if you do buy the lows and sell the tops.
This is to say:
If your trading costs are 2% then:
A) you may do fine on a 2% volatility asset in a market trending up,
B) you may still survive on a 2% volatility in a market trending horizontal,
C) you will have loses on a 2% volatility asset in a market going South.
vide graph:
To the above challenge, there are 2 solutions. One is the simple joe way, the other is the simple trader joe way.
The simple joe way is to only trade on the up markets and on volatile horizontal markets.
The trader joe way is to REVERSE the trading tactics on a falling trend: SELL first, let the market fall, catch the low and BUY BACK there.
If you apply the latter method, you will get rich, or poor, twice as fast as the simple joe.
So ...
This is the end of part 2 of my mini tutorial on what volatility is all about and how to use it to your benefit in trading any simple asset, on any market.
Next week I will write something about risk. I think very many young speculators grossly underestimate risk. So maybe it is good to talk about it next. Stay tuned.
A killjoy moment (for the most patient reader only) :
In a downtrend market that is 2% volatile, if you fail to catch the low and sell the top, your calculation looks rather like this:
Buy at 100, commissions 1%,
Market slips to 98,
Sell at 98, commissions another 1%.
You have 98 - 2 = 96 points left on your license.
(This is a warning for the beginners, and an argument against buy/sell trades on falling trends. Sell/buy OR stay OFF.
Sergei
