How to Survive and Thrive in Low-Volatility Markets

To traders far and wide, low-volatility markets are a bit like a sports car with no gas; a pool without water; or perhaps an open bar with no libations…talk about a buzzkill!

All jokes aside, though, low volatility is serious stuff. It's disheartening for disciplined traders and can be utterly confounding. Worst of all, however, unsuspecting traders can—and will—commit cardinal mistakes that could cost them their entire careers as a result of it. 

Fortunately, several core aspects of the Lazy Trader methodology are uniquely suited to trading low-volatility market conditions. That's why, throughout this article, we will explore critical considerations for staying safe, stress-free whilst enjoying profitable trading despite this rampant low volatility and those dreaded "Summer Doldrums."

• Why low volatility is normal

• 3 ways to take advantage of low volatility!

• Find out what the biggest mistake in lower volatility markets is

Low Volatility and the "Summer Doldrums"

What seems to be the problem here, anyway? Is it the "easy-money" world central bank monetary policies that have caused volatility to come to this slow, grinding halt? Have traders taken to the sidelines before going on holiday this summer? Or are there just more eyes on the World Cup than on the markets right now?

Well, surely this is a combination of multiple factors, and it's not limited to just currencies, either. At the time of writing, the VIX has fallen near all-time lows, while in comparison, implied volatility on USD/JPY has in fact hit a record low, and EUR/USD volatility has sunken to depths not seen in 7 years!

Why is this perhaps the top story in all of trading right now? After all, low volume indicator, low-volatility trading tends to prevail throughout the summer months as part of the known seasonal pattern, the "Summer Doldrums." This year is quite different, though, and the lasting nature of these conditions is a resounding signal that there has been a change in the markets that deserves the full attention of technical traders. Here's what to do:

Trade the Highest-Probability Set-ups for Low-Volatility Markets

So by now you've heard all the bad news about low-volatility markets: slower price action, fewer viable set-ups, and in all, a more difficult trading environment. May as well head for the sidelines since the deck is stacked against you now, right? Not necessarily!

Here's the good news: you can trade successfully despite low volatility. It takes lots of patience, some flexibility, and unwavering discipline, but Lazy Traders are still making money, and this is how you can, too.

• Use Proven Range Trading Strategies: In low-volatility markets, breakouts turn into fake-outs more often than not due to the lack of volume and conviction needed to sustain these moves. However, established ranges on higher time frames like the daily chart—which we predominantly trade here at Lazy Trader—tend to hold up quite well, especially without the benefit of major fundamental catalysts (changing interest rates and/or central bank policy measures) to move price beyond the established range boundaries.
• Short-Term Momentum Breakouts: Even low-volume, low-volatility markets pick up some steam from time to time, often following news and economic data releases. Trading the news can be tricky, but besides observing pure price patterns on the charts, news does help move markets. Regardless, we like to dampen the impact of news and data by 1) trading higher time frames like the daily; and 2) trading end of day to prevent those dastardly news-driven whipsaws.
• Be Nimble and Use Exacting Risk Management: "Stick and move!" Both in combat, and in low-volatility markets, that's some great strategic advice that can really keep you from getting hurt! Have you considered trading only half your normal position size? Many veteran traders already are, and that's one of the quickest and most efficient ways to mitigate risk in these or any conditions. Don't stop there, though. Trail your stops closely behind, and take profits quickly (maybe you can engage in scalping?) when they arise, because trends are far less likely to run for long periods in low-volatility markets.

The #1 Trading Mistake in Low-Volatility Markets

You trade to make money, right? Of course; that's a silly question…we all do. However, when volatility dries up and viable set-ups become scarce, frustration and fear of missing out often kick in, producing what is the single worst trading mistake traders can make, anytime really, but especially in low-volatility markets:

Do not force trades that don't "follow the rules!"

The tendency—no, more like the almost overwhelming urge—in low-volatility markets is to take less-than-perfect set-ups just to satisfy some emotionally-driven need to be in the markets. You can't win if you don't play, right? Well, when it comes to trading the markets, that couldn't be more wrong, yet it's a belief that will cause traders to suffer damaging losses or even outright catastrophe, now and in the future.

See also: How to Make Money from Staying Out of the Market

Risk is high whenever volatility is low, and that's no time to take chances or "roll the dice" on a set-up that looks "good enough." Market conditions may vary wildly, but a consistent trading strategy never does.

In low-volatility markets and always, be diligent and discerning in the trades you take, making sure that each one satisfies all of your desired technical and/or fundamental qualifications before risking any of your hard-earned capital.

Conclusion

High-volume, high-volatility market conditions are what most traders dream about. Loaded with seemingly endless possibilities, there are set-ups and profit potential at every turn.

In low-volatility markets, though, there's success in survival. That may well mean smaller position sizes, smaller risks, and (probably) smaller profits, but that's because different market environments require different thinking.

Trends only run for a short time without volume or volatility in their favor, so look for selective, risk-controlled opportunities that "follow the rules," and gladly accept your seat on the sidelines when none are available.

String together small wins if and when you can, and each time you do, take pride and solace in the validity of any trading strategy that performs in low-volatility markets. We Lazy Traders will readily agree, as would any of the many thousands of traders out there who are struggling mightily, that's no small feat, indeed.