How to anticipate market volatility

The recent market volatility has taken some traders by surprise, coming on
the heels of one of the least volatile periods in the past decade. Active
traders are vitally concerned with market volatility, because this defines the
movement in equities, which in turn provides opportunity for directional
trading. If we can anticipate market volatility, we can gauge the amount
we can likely take out of trades, as well as the amount that trades might go
against us. All things being equal, a busy, volatile market will provide
more tradable swings than a slow, non-volatile one.

Just knowing past price ranges and changes can help us assess near-term
future volatility, because volatility (unlike price change) tends to be
correlated from one period to the next. For example, since October, 2003
(N = 670 trading days) in the S&P 500 Index
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, we have had 61 days in
which the high-low range has exceeded 1.5%. The average trading range the
following day has averaged 1.11%. That is appreciably wider than the
average range for the rest of the sample: .94%. When the previous
day’s range has been below .50%, the next day’s range has averaged only

The size of the market’s overnight range also affects the coming day’s
volatility. As I recently noted on my
TraderFeed research blog, large
overnight moves are associated with greater movement during the trading
day. This is probably because fundamental economic or political events are
roiling overseas markets, creating lingering impacts for American traders.
For instance, when the overnight move in SPY has been greater than .50% (N =
55), that day’s trading range has averaged 1.15%, wider than the average range
of .94% for the rest of the data sample. As a point of reference, in the
current market, this difference would amount to 2.5 S&P points.

The absolute value of the VIX
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at the market open also appears to be related
to the size of the day’s trading range. When the opening VIX has been 17
or above (N = 97), the day’s range has averaged 1.11%, wider than the average
range of .93% for the remainder of the sample. When the opening VIX has
been below 12 (N = 128), the day’s range has only been .79%.

We’ve been seeing healthy overnight moves and daily ranges–as well as
elevated VIX levels–during the past week. That bodes well for market
movement in the near term.

Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of
Psychology of Trading
(Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at
and a blog of market analytics at
His book, Enhancing Trader Development, is due for publication this fall