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Trader's Corner

Success in Volatile Markets

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There are numerous obstacles to profitable trading in a fast moving market environment.

Wide price fluctuations and significant changes in trading volume typically characterize volatile markets. These conditions often arise as a result of an imbalance of (buy/sell) orders in one direction or another and they can occur at any time during the trading day, either in over-the-counter exchanges or the NASDAQ. The volatility can be driven by many different factors including news releases, analyst ratings and recommendations, web blogs and/or rumors in chat rooms, changes in interest rates or other fundamental economic factors, interviews with leading policy-makers, or sometimes, for no obvious reason at all.

In some cases, the sheer volume of trades being processed in a fast moving market will lead to delays in trade execution and/or trade reports. Price changes and order executions occur so quickly that there are significant differences between the quote you receive at one point in time and the price at which the trade is executed later. Even real-time quotes can lag behind the current market in these situations. The number of shares/contracts available at a certain price and the size of the position offered at the current quote by a market-maker can also change rapidly, significantly affecting the likelihood of your order being filled at the previously quoted price.

Market orders are executed on a first-come first-served basis. The high volume of orders that are rapidly submitted to market makers and specialists from many broker-dealers can create a backlog and cause significant execution delays. As a result, when you place a market order under these conditions, the quote you get is more an indication of what has already happened than that of the execution price you will receive.

In the time between when your order is placed and when it is executed, other orders already in line ahead of yours can adjust the stock/option price and movement. There are also significant delays between an initial partial execution you receive, which may be an automatic execution, and the subsequent fill of the balance of a larger order, which may be executed manually. Most exchanges offer automatic execution for eligible securities up to certain size positions. However, during volatile market conditions, that feature may be modified or suspended for some or all issues. Under those circumstances, delays may result and order executions can occur at prices less favorable than those originally quoted.

If you place a trade order during a volatile market, there is no guarantee that your order will be executed. Entering a limit order merely allows you to establish a buy price at the maximum you are willing to pay, or a sale price at the lowest you are willing to receive. Even when the market moves to your limit price, there is no guarantee that you order will be executed because there may be limit orders from other customers ahead of yours. During a fast market, it is recommended that you don't attempt to change or cancel limit orders. Change or cancel orders do not expedite trade reports in a fast market; they actually burden the system with more information to process. If you enter a change, the broker will process your request on a best-efforts basis and that change will probably result in your order moving to the back of the line.

A fundamental requirement for successful trading in a fast moving market environment is to use a broker that executes your orders in a timely manner. Better yet, engage an effective broker as a personal trading representative that can enter and exit multiple positions based on pre-defined criteria for specific (favored) options strategies. The derivatives market offers a number of versatile financial instruments that can be bought and sold individually and in combinations. This flexibility allows you to choose a style suitable for both your personality and the current market environment. Once you have identified techniques that fit in each category, make your desires and expectations clear to your broker and he will be more able to efficiently execute the transactions you are paying him to perform even in the most volatile conditions.

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