The futures markets are dynamic arenas defined by the robust participation of traders and investors alike. Whether a trader crafts trading decisions based on technical or fundamental analysis, futures can be an opportune venue for success.
As a general rule, futures markets are prone to periods of intense volatility, which is defined as a rapid and substantial fluctuation of asset pricing. Traditional finance goes to great lengths to account for volatility because it’s typically viewed as a driver of risk. Standard deviation, as well as alpha and beta measures, are examples of devices traders use to quantify the foreseeable impact of volatility on portfolio performance.
In contrast to conventional financial theory, active traders welcome enhanced degrees of volatility. Trend, momentum, and reversal strategies are a few methods of realizing profit from seemingly chaotic price action. But what happens when a market does not move? How can active traders profit from static asset pricing? The answer lies in adopting a strategy that pertains to rotational markets.
What Are Rotational Futures Markets?
In order to understand what a rotational market is, a trader must first examine the process of price discovery. Price discovery is the mechanism by which a market defines the current value of a security or asset. When conducted in an open-auction format, price discovery is the result of all buyers and sellers interacting with one another while adhering to their strategies or opinions.
During periods when the process of price discovery appears complete, markets enter a near-equilibrium state known as rotation. Also referred to as being “range bound,” rotational markets typically occur following a pronounced directional move. They represent an ongoing debate over a security’s value, exhibiting a horizontal pattern at a specific price level.
The concept of rotation can be a complex one. However, experienced traders are able to spot a range bound market very quickly. It’s marked by several characteristics, including a constrained trading range, “whipsaw” or “choppy” conditions, and inconsistent pricing momentum.
Strategies for Trading Rotation
For many traders, rotational futures markets pose a monumental challenge. Because price is noncommittal, trend and counter-trend strategies are rendered largely ineffective due to the tight trading ranges. Catching breakouts also proves difficult because irregular price action frequently produces an abundance of false signals.
So, is it possible to trade a market that has no direction? Given the proper perspective, the answer is yes. Here are a few technical tools and strategies that traders frequently apply to range-bound markets:
- Market profile: The market profile is a specific type of pricing chart that illustrates the distribution of traded volume over a given price range for a specified period. Actively buying or selling a distribution’s outer levels in anticipation of price returning to its point of control (the most heavily traded pricing level) is a common method of engaging range bound products.
- Support and resistance levels: Clearly defined technical levels often create barriers that constrain the movement of price. These barriers are known as support and resistance levels. In the event that a market is trading in a nondirectional fashion, areas of support and resistance can serve as ideal entry points to benefit from price regressing towards its periodic median.
- Pivot points: Pivot points are tools that take into account a security’s periodic high, low and closing values to determine forthcoming support and resistance levels. Although Pivot points are commonly used to gauge an active market’s direction, they may also be employed to predict specific areas where a market may become rotational.
Without a doubt, range-bound futures markets can test the patience of even the most disciplined traders. However, given the appropriate perspective, they provide a unique array of opportunities and may become a welcomed addition to any comprehensive trading approach.
Often, experience is the best teacher. Daniels Trading’s brokerage services team can provide insights gained from years spent in the futures markets to help you successfully integrate rotational strategies into your trading plan.