Velocity Versus Risk In Trading

VELOCITY VS RISK: Velocity versus Risk in Trading

Velocity and Volatility are very similar in nature, but there is a difference. Hopefully, during this trading discussion concerning Velocity Vs Risk, it will make a lot more sense.

Volatility is defined by how much the average movement of the market you are trading  is moving on a day to day basis. For instance, a 1R or 10 tick movement in Crude Oil is less volatile, than a 3R or 30 tick movement for a stop loss. In dollar cost, this is $100 versus $300 as it relates to the Crude Oil Market.

When I first started the concept of “R” I used a concept of what I called Average Daily Range (ADR). I still use this concept to determine the Volatility. Velocity is closely tied to Volatility, because you can’t have one without the other.

Crude Oil Futures Market: 5 Minute Candlestick Chart

How FAST is the Futures Market Moving?

Velocity is more specifically how “fast” the current market is moving. When you are trading the Crude Oil Futures Market, then this can be best seen right at the open of the trading session in the USA. Velocity is also closely tied in with Volume.

When you are looking at your futures trading charts, then you may notice that a high spike volume bar will show up. This High Volume Spike (HVS) comes into the market, then the market seems to pick up steam and the trading bars (candlesticks) print much quicker.

This is what you see in a fast moving market.

When the market is moving slow or fast, then it is best seen on a tick chart versus another chart like a 5 minute chart.

Crude Oil Futures Market: 5 Minutes of Tick Data

In the Crude Oil Futures Market, you can count on one report each week, which will influence a quicken the pace of the trading day. Normally, on Wednesday’s at 9:30AM, the Crude Oil Market Releases the Crude Oil Inventory Report.

The next trading chart below shows the open of the Crude Oil Futures Market on October 22nd, 2015, specifically the time period of 8:00AM to 8:05AM CST is bracketed off. This will allow you to see velocity of the market a lot better. Let’s compare this tick chart against the tick chart right after the report release.

Crude Oil Futures Market Tick Chart at the Open 8:00AM CST:

Crude Oil Inventory Report Releases at 9:30AM CST:

How About Velocity and How Do You Trade It Profitably?

At other times, one minute of data can bring a lot of trading candlestick bars. Look at what happened on October 28th, 2015 at 9:00AM CST. Yes, this is just one minute worth of data being represented.

By now, you should be able to see, if you were able to know in advance which way the market is going, then you would be a very wealthy person. Now, becoming a successful trader is all about having an edge and trading your edge.

Crude Oil Futures Market 1 Minute of Data 9:00AM CST to 9:01AM CST
(on October 28th, 2015)

Just comparing these three charts, then you can see the that one is three times greater than the other chart on the same 5 minutes worth of data component.

Here is where you can say, the Velocity of the market is triple what it is normally. Once again, both charts are tick charts and both are 5 minutes worth of data compressed into this manual to show you what each time period can look like at different periods of the trading day.

And on the other or third chart, then you can see how truly fast a market can move when it is either driven on an event or somebody or group of people positioning ahead of something they believe. You would call this people in the know.

I hope this helps in your understanding over Futures Trading in the Crude Oil Futures Market.


Good Trading and God Bless,

David M. Knight

P.S. Get the Latest Version of my Trading eBook Here: From Failure to Success as a Trader

About The Author

David M. Knight

I am a 30 Year Futures and Commodities Trading Veteran. In addition, I enjoy games of skill and chance like: poker, craps, blackjack and roulette. During my professional career, I have developed and implemented successful trading strategies and methods; along with winning systems in games of skill and chance. Join with me on our mutual journey together.