“Market Volatility” refers to the degree of price variation of a financial instrument over a certain time period. It is often measured by the standard deviation or variance between returns from that same security or market index. High volatility often means dramatic price swings, and low volatility often indicates more stable prices.
The question is: do traders perform better when markets are moving, or when they’re calm? It all depends on what type of trader you are.
What happens in high volatility?
When volatility is high, retail traders flock to the markets in droves looking for those big winners and chasing the excitement.
The fear of missing out can drive impulsive or risky decisions, which might have a negative effect on performance – this was evident during the GameStop stock episode of 2021, when day traders banded together on Reddit and effectively moved the market. Cries of “hold the line” and “do not sell” were seen across social media platforms, which helped drive up the stock of GameStop to astronomical levels. Although effective initially, the Gamestop situation ultimately resulted in a small minority of traders who won big. For more inexperienced traders who jumped in when they saw others doing the same, their trading journey ended with a loss.
The increased risk inherent in high volatility markets should mean that traders trade more during low volatility, but that often isn’t the case. Many traders stay out of the markets, waiting for more movement. But we believe that periods of low volatility make trading less risky, and are therefore a great time to work on trading plans, keeping disciplined, and using the slower markets to make better decisions.
Do traders perform better during high volatility or low volatility?
This depends on many factors.
Understanding where your strengths lie helps you know where to focus. But remember, markets can shift. Being flexible and ready for any market mood is the key to long-haul success. Keep learning and tweaking your approach as things change.
Why do a lot of traders perform better when volatility isn’t high?
For beginners, high volatility is typically the worst time to start trading.
A really strong start – which could be simply good luck – can lead to over confidence, while a really bad day can destroy a new trader’s account before they have had a chance to get familiar with trading.
Plus, high volatility can cause a number of behavioral biases to come into play which can negatively impact performance:
As Warren Buffet said, “Be fearful when people are greedy, and greedy when people are fearful”. FOMO traders do the exact opposite, resulting in panic buying, then panic selling.
It’s important to know how volatility impacts your performance, so you can protect your weaknesses and play to your strengths. In the Performance Analytics tool in your FOREX.com account, the “Market Volatility” edge under “Market Edges” groups your trades based on the level of market volatility at the time of the trade. It helps you understand if your profitability varies with high volatility versus low volatility market conditions. Understanding this can help you manage your trading strategy more effectively. For example, if you perform better in high volatility conditions, it might suggest that you’re effective at taking advantage of large price movements. On the other hand, if you perform better in low volatility conditions, it might suggest that you’re more effective at trading in more predictable, less volatile markets.
For example, this trader has a weakness in low volatility and a strength in high volatility. He may ask himself if low volatility makes him restless and bored, which may lead to overtrading. He also might be an experienced trader who can use high volality to his advantage.
It is essential to to know which type of trader you are. Below is a generalized summary of the trader profile that works best in high volatility and low volatility.
What can traders do?
Each trader should understand their own strengths and weaknesses in different market conditions. As seen above, the Performance Analytics feature will help you understand your strength and weakness, and how much each is costing or making you, based on your trading history.
It’s important to always keep the bigger picture in mind. If you are successful during high volatility, consider these points to improve your trading in all areas:
Know Your Edge. Pinpoint what makes you succeed when volatility is high. Knowing your strengths can help you double down on them.
Strategize Smartly. Ensure your approach leans into these strengths.
Act with Purpose. Big market swings might need quick decisions. Have a plan so you’re ready to roll when things align.
Keep Emotions in Check . Stay steady. Remember your plan, especially when the market’s on a rollercoaster ride.
Review Often. Check how you’re doing often to see what’s working and what’s not.
Stay Adaptable. Be ready to tweak your game if markets shift. A strategy perfect for one kind of market may not fit another.
If you are not finding success during Low Volatility, you may want to consider the following actions. Quiet markets can be a great time to cement good habits:
Reflect on Strategy. Use the calm to sharpen your trading goals and strategies.
Mindset Check. Cool down, reset, and prep your mind for good decisions.
Strategy Adjustment. Think about tweaking your trade sizes, filtering your trades more, exploring new indicators or even diving into different assets more in line with your style.
Practice Discipline . During quieter times, the lower stress levels can benefit less-experienced traders, making it an ideal time to practice discipline and good risk management.
Keep Learning. Dive into analysis, tweak strategies, and always be ready to adapt. The market waits for no one, but you can be ready for anything it throws your way.
Conclusion
Market volatility does affect a trader’s performance, and traders, on average, perform better when volatility isn’t high – even though some experienced traders can take advantage of the larger moves. So identify whether volatility is a strength or a weakness for you, and adapt your trading strategy accordingly.
The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.
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The question is: do traders perform better when markets are moving, or when they’re calm? It all depends on what type of trader you are.
What happens in high volatility?
When volatility is high, retail traders flock to the markets in droves looking for those big winners and chasing the excitement.
The fear of missing out can drive impulsive or risky decisions, which might have a negative effect on performance – this was evident during the GameStop stock episode of 2021, when day traders banded together on Reddit and effectively moved the market. Cries of “hold the line” and “do not sell” were seen across social media platforms, which helped drive up the stock of GameStop to astronomical levels. Although effective initially, the Gamestop situation ultimately resulted in a small minority of traders who won big. For more inexperienced traders who jumped in when they saw others doing the same, their trading journey ended with a loss.
The increased risk inherent in high volatility markets should mean that traders trade more during low volatility, but that often isn’t the case. Many traders stay out of the markets, waiting for more movement. But we believe that periods of low volatility make trading less risky, and are therefore a great time to work on trading plans, keeping disciplined, and using the slower markets to make better decisions.
Do traders perform better during high volatility or low volatility?
This depends on many factors.
Typically, a trader who performs well in high volatility may display some of the following characteristics:
Emotional Control. Staying steady and following your plan, especially when the market jumps around, can be a game-changer. This calm might let you use big market shifts to your advantage, without getting swept away by excitement.
Valuable Experience . If you’ve been around and seen market storms before, you’ve probably learned some smart moves.
Speedy Decisions. Making fast, smart calls can help grab opportunities that volatile markets sometimes offer.
If a trader has a weakness in high volatility, it may be due to:
Emotional Responses. Big price changes can stir up strong feelings like fear and greed. This might lead to hasty decisions, such as acting too soon or taking big risks. The fear of missing out on a good deal (FOMO) can also push you to stray from your trading plan and jump on a hot trend.
Risk Management Challenges. In times of great market movement, it’s easy to get tripped up. You might set a stop loss that activates too early or unknowingly take on too much risk.
Lack of Understanding. If you’re not sure why the market’s moving so much, it’s hard to make the right call. Fast and unpredictable changes can make things confusing. It’s tempting to follow the crowd, thinking they know best - but when everyone thinks like this, bubbles can form. Just look at what happened with GameStop.
Timing Issues. Quick price shifts can mean missed chances or poor trades.
Psychological Pressure. Stressful trading can cloud your judgment, leading to mistakes.
If a trader has a strength in low volatility, it can be the result of:
Calm Decisions. The quieter market might help you think clearly, without the rush of excitement or fear.
Patience Paying Off. Waiting for the right moment and sticking to your plan? That’s gold in a calm market.
An Eye for Detail. With less noise, you’ve got the time to dive deep into market details, leading to smarter trades.
Smart Strategies. Some strategies, like range trading, are designed for quieter times. If that’s your game, you’re in luck.
Cool Headedness . Fewer wild price jumps mean fewer chances to get swept away by emotions.
Safe Leverage. Managing your leverage gets easier when the market’s calm, helping you sidestep risks tied to big swings.
If a trader has a weakness in low volatility, it may be due to:
Strategy Misalignment. Some trading methods love big market moves. If that’s your style, you might find a calm market hard to crack.
Overtrading. Fewer big price changes might make you restless. This could lead to making too many trades or forcing trades that aren’t really there, costing you more in fees and potentially leading to bad calls.
Psychological Factors. Some traders love the rush of a busy market. Without that excitement, you might get frustrated and make hasty decisions.
Understanding where your strengths lie helps you know where to focus. But remember, markets can shift. Being flexible and ready for any market mood is the key to long-haul success. Keep learning and tweaking your approach as things change.
Why do a lot of traders perform better when volatility isn’t high?
For beginners, high volatility is typically the worst time to start trading.
A really strong start – which could be simply good luck – can lead to over confidence, while a really bad day can destroy a new trader’s account before they have had a chance to get familiar with trading.
Plus, high volatility can cause a number of behavioral biases to come into play which can negatively impact performance:
Herd instinct
Herd instinct is where traders make decisions based on what they think other traders are doing instead of doing their own analysis, under the assumption that other traders have done their research. When enough people adopt this way of thinking, bubbles can form and inexperienced traders may not be equipped to handle the new market conditions. We saw this happening a couple years ago with GameStop.
Loss aversion
Loss aversion causes traders to act irrationally. Humans experience losses more severely than equivalent gains. So when a market is volatile, traders perceive the losses as worse than the gains, even if they are the same. Then they begin making impulsive and irrational decisions to avoid another loss.
FOMO
Fear of missing out (FOMO) heightens emotions when volatility is high, making the chances of irrational trades more likely. Traders are afraid they are missing out on a big market opportunity, so ignore their trading plans and make higher levels of risky trades.
As Warren Buffet said, “Be fearful when people are greedy, and greedy when people are fearful”. FOMO traders do the exact opposite, resulting in panic buying, then panic selling.
It’s important to know how volatility impacts your performance, so you can protect your weaknesses and play to your strengths. In the Performance Analytics tool in your FOREX.com account, the “Market Volatility” edge under “Market Edges” groups your trades based on the level of market volatility at the time of the trade. It helps you understand if your profitability varies with high volatility versus low volatility market conditions. Understanding this can help you manage your trading strategy more effectively. For example, if you perform better in high volatility conditions, it might suggest that you’re effective at taking advantage of large price movements. On the other hand, if you perform better in low volatility conditions, it might suggest that you’re more effective at trading in more predictable, less volatile markets.
For example, this trader has a weakness in low volatility and a strength in high volatility. He may ask himself if low volatility makes him restless and bored, which may lead to overtrading. He also might be an experienced trader who can use high volality to his advantage.
It is essential to to know which type of trader you are. Below is a generalized summary of the trader profile that works best in high volatility and low volatility.
What can traders do?
Each trader should understand their own strengths and weaknesses in different market conditions. As seen above, the Performance Analytics feature will help you understand your strength and weakness, and how much each is costing or making you, based on your trading history.
It’s important to always keep the bigger picture in mind. If you are successful during high volatility, consider these points to improve your trading in all areas:
Know Your Edge. Pinpoint what makes you succeed when volatility is high. Knowing your strengths can help you double down on them.
Strategize Smartly. Ensure your approach leans into these strengths.
Act with Purpose. Big market swings might need quick decisions. Have a plan so you’re ready to roll when things align.
Keep Emotions in Check . Stay steady. Remember your plan, especially when the market’s on a rollercoaster ride.
Review Often. Check how you’re doing often to see what’s working and what’s not.
Stay Adaptable. Be ready to tweak your game if markets shift. A strategy perfect for one kind of market may not fit another.
If you are not finding success during Low Volatility, you may want to consider the following actions. Quiet markets can be a great time to cement good habits:
Reflect on Strategy. Use the calm to sharpen your trading goals and strategies.
Mindset Check. Cool down, reset, and prep your mind for good decisions.
Strategy Adjustment. Think about tweaking your trade sizes, filtering your trades more, exploring new indicators or even diving into different assets more in line with your style.
Practice Discipline . During quieter times, the lower stress levels can benefit less-experienced traders, making it an ideal time to practice discipline and good risk management.
Keep Learning. Dive into analysis, tweak strategies, and always be ready to adapt. The market waits for no one, but you can be ready for anything it throws your way.
Conclusion
Market volatility does affect a trader’s performance, and traders, on average, perform better when volatility isn’t high – even though some experienced traders can take advantage of the larger moves. So identify whether volatility is a strength or a weakness for you, and adapt your trading strategy accordingly.
The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.
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