The volatility is where the magic occurs for many traders. It’s a dual-edged sword, however If you’re dealing in S&P 500 futures with an agency that deals in props, then you’re probably aware the risk-reward equation goes in the same way. And volatility? This is the essence of the whole game.
Let’s look at how you can trade volatility with S&P 500 Futures within a prop-firm setting. If you’re trying to sharpen your skills or simply want to avoid being tossed around by the wild market fluctuations, this is perfect for you.
Why S&P 500 Futures Are a Playground for Volatility Traders
Why do we have S&P 500’s futures? First of all they’re extremely liquid. This means that they have quick fills, tight spreads and a lot of price movement. Prop traders love it.
The S&P 500 (ES futures) tends to respond strongly to news about economics or earnings cycles as well as geopolitical news headlines. If the Fed talks about the Fed, the ES shifts. If Apple gets sick and the ES gets an illness. The ES’s responsiveness is a perfect fit for strategies that are based on volatility.
S&P 500 futures trade almost all day long. This 24/7 access allows Prop firms’ traders the chance to stay on top of volatility throughout the night, when Europe opens, or when Asia concludes. In short that volatility is never asleep and neither do well setups.
What Is Volatility?
The word is heard frequently. Today, the market is extremely volatile. What does this actually mean?
In the world of trading the term “volatility” is the amount the price fluctuates over a certain time. The greater the number of swings in the market, the greater the volatility. It could be quick up-and-down fluctuations (choppy markets) or huge directional movements (trending volatile). Both are relevant, but both require completely different strategies.
In a prop company, traders tend to pay attention to the implicit volatility (what the market for options estimates) as well as realized volatility (what’s actually taking place). Futures traders are particularly interested in instruments such as the VIX (the”fear gauge” or “fear gauge”) as quick indicators of anticipated S&P volatility.
Why Prop Firms Love (and Fear) Volatility
Prop companies thrive when their traders are able to capitalize on large movements. This isn’t a secret. The more opportunities the market offers an experienced trader will be able to make.
However, volatility can also ruin those who aren’t disciplined. This is why many prop companies have strict risk policies that are in place: daily drawdown limits, maximum loss thresholds, and stop-out guidelines. They’re not just for display purposes, they’re designed to protect both the business as well as the trader.
While volatility may boost your P&L However, it can also ruin it within a matter of minutes if you’re not prudent.
Strategy 1: The Opening Range Breakout
The most well-known volatile strategies in the futures trading particularly at prop firms, is called the Opening Range Breakout (ORB).
Here’s how it is done:
- You will mark the high and lowest of the first 15-30 mins after the U.S. market opens.
- If the price is above this price, you may want to think about buying.
- If it is below the threshold the level, you are short.
This method is based on the notion that trading activity can set the mood. In the event of high volatility,, the breakouts could result in rapid movements.
In an event setting you’ll probably learn to integrate this with the confirmation of volume or an announcement catalyst. A breakout that doesn’t have volume? Most likely an attempt to fake it. However, a breakout following NFP information as well as CPI numbers? This is where the gold lies.
Pro Tips: Set stops that are within the range to limit the risk. The volatility of the market is great, but unsuccessful breakouts are common, particularly when algorithms are hunting stops.
Strategy 2: Mean Reversion During Volatility Spikes
It isn’t always a trend. Sometimes, the market will be wildly volatile without explanation like an extreme reaction to a tweet, poor interpretation of a news event or simply a lack of liquidity. Mean reversion becomes relevant.
It is a bet you will see the value go back to the mean (often the VWAP or shorter-term moving average) because it has moved too fast and has gone too far.
Prop companies frequently train traders about what to look out for.
- Differences between volume and pricing
- The price is off the average by several standard deviations.
- Candles or Wicks to help exhaustion
Strategy 3: Volatility Breakouts After Consolidation
It is not a sudden event. It is usually triggered by compression, where the price stretches like a spring during periods when there is a lack of activity.
Prop firm traders are looking for breakout opportunities in narrow consolidation ranges in these instances. Consider them as triangles, rectangles or flags. The most important factor is to compress them.
The ATR (Average True Range) and Bollinger Bands are two instruments that will assist in determining these configurations. This could signal that a major shift is in the near future in the event that bands get tighter and ATR decreases.
It is best to trade with the intention of a breakout, and preferably with a trailing stop in order to make sure you are able to lock in profits as the trade progresses.
Strategy 4: VIX divergence from S&P Futures
Prop Firm traders that love playing chess with checkers are a fan of this more complicated game.
The VIX usually increases in the event that S&P 500 futures fall (and reversed). Sometimes, however, they do so in tandem, or the VIX was ahead of in the ES move. It is the word used to describe something and could suggest that something is not at the same time.
If the VIX is rising in tandem with the ES? It could signal a correction in the market as a result of the lingering fear.
If there’s something that doesn’t feel right, traders may use this strategy to limit their risks or prepare themselves in anticipation of a change.
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Disclaimer: This content does not have journalistic/editorial involvement of Trade Brains Team. Readers are encouraged to conduct their own research before making any decisions.
