What to do with quiet markets?

Just a high level perspective on what we have going on in a few major markets this week. In general, most markets are in some kind of volatility compression. Volatility compression is a term that basically means current volatility conditions are low, relative to more “normal” volatility for each specific market. There are many ways to measure this (and some traditional chart patterns capture volatility compression very well), but a few general points to consider:

SPY with 5 and 60 day historical volatilities
SPY with 5 and 60 day historical volatilities
  • It’s easy to lose track of quiet markets. People get bored and stop paying attention. The media stop talking about quiet markets (because quiet markets are boring). If you’re a trader, you cannot afford to lose track of quiet markets. Do the work every day, and watch for breakouts.
  • Volatility compression can be thought of as “coiled potential”–when the market eventually moves, there is a higher chance of a sharp momentum move. Another way to say the same thing is that mean reversion tends to be muted when markets come out of volatility compression.
  • From a practical perspective, at the very least, you do not fade the first move out of volatility compression. This is an environment where breakout trades tend to work, so don’t put yourself on the wrong side of that trade.
  • If you are a trader (as I am) who sizes trades based on current volatility, realize that tomorrow’s volatility can be some whole number multiple of today’s. In other words, that position that feels good today may be terrifyingly over-sized tomorrow. There are ways to deal with this, but they all involve tradeoffs.

Whatever we’re looking at: stocks, oil, gold, (most) rates, (many) currencies–we find quiet markets that may appear boring, at first, but this placidity hides tremendous potential and significant risk. We say all that time that part of your job as a trader is to stand apart from the crowd. This–paying attention to quiet markets, not acting too soon, but acting on the correct triggers–is an important and, perhaps, under-appreciated way that a skilled trader must stand apart from the crowd.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 2 Comments

  1. Steve LeMoine

    Great post Adam…this is exactly the concept I use for most of my setups. Volatility compression or consolidation can lead to great returns. Plus I love the fact that the stops are usually quite easy to identify. The key component is waiting for the right trigger as you said.

Comments are closed.