Volatility is Back. What Does That Mean for Autotrading?

If you have followed us for any length of time you know that we prefer volatile markets. Well, they’re back. So let’s go over what that means for our programs and clients. 

You can think of volatility as the fuel that drives the profit opportunity for our strategies. Simply put, when volatility is lower, profit opportunity is lower - and when volatility is higher, profit opportunity is higher. Let’s look at an example with some data. 

The VIX is a common measure of volatility. The larger the number, the greater the expectation of future market volatility. The VIX long term average is around 19; currently it is above that. However, for the first 6 months of the year the average VIX was 13.8 - lower than any year since 2017. (By comparison, it was considerably higher in 2023 with an average of 16.8, and 25.6 in 2022.)

In the table below we compare recent examples of markets with normal volatility (2023) and high volatility (2022). We will use our Meta programs to show how the different volatility levels can impact autotrading performance for some of our programs.

As the data illustrates, there can be <double> the profit potential when the markets are volatile, with only a small increase in the risk required. That’s because the potential profits per trade are unlimited, while the maximum potential loss is capped by each program’s daily risk limit. This is what we call “asymmetric return” potential. To put it into real-time perspective, last week both Meta programs took a trade that risked ~$1,500 and finished with a profit of over $4,700 for the day. That math works.

So why don’t our algos only trade when the VIX (expectation of futures volatility) is normal or high?  In a nutshell, volatility (and the many ways of measuring it) is a core factor that is evaluated everyday by our AI / machine-learning engine. And, we have strategies which are designed specifically for performing well during lower volatility environments. Plus, volatility spikes can occur at any time and missing them can be quite costly (in terms of missed profits.)

Bottom Line:  Volatility appears to be back and that should increase the magnitude and frequency of high profit trades for the iQ autotrading programs for the foreseeable future. As always, “should” does not mean “will,” but the odds are in our favor. 

Did You Know?

Risk management is the first priority at InvestiQuant and not all volatility is good when autotrading. There are rare periods when market volatility can be so high that the daily risk required to properly execute some trades exceeds the risk tolerances for a program. In these situations, the strategies will “auto-pause” and wait until the market settles down enough to safely resume trading. Meaning your account’s trading activity may slow down or even stop and sit safely in cash and out of harm's way for a week or two until the extreme volatility spike abates.