Traders have been knocked around markets by the increased volatility in 2008 and 2009. Index moves of between 2 to 3 percent used to be rare, but are the norm in today’s environment. These kinds of margins play havoc with stop-loss settings.
It’s fair to say that we’ve been whipsawed in and out of stocks by short-term volatility, even though the underlying trend is consistently moving in a single direction. And the result seems to be a loosening of stops to counter the extra volatility. It sounds perfectly logical, but it also increases the risk in a trade.
Part of the problem, comes from the way we defined trend behavior before 2008.
We’ve become lazy. Traders assumed that price volatility is the same as trend volatility. In the past, trend management tools were based on measuring price volatility. But things changed in 2008.
Traditionally most traders see volatility as an enemy. The solution is to shift our understanding of trend volatility. Traders can then use volatility as a friend.