Trading ahead of a news event like OPEC's meeting in Vienna can be unpredictable even if the investor is certain of the outcome and by making fewer trades during volatile times, the amount of risk can be lowered.
The results of both Brexit and the U.S. presidential election surprised the markets, and many investors, sending the futures market down by hundreds of points before it reversed itself.
"Even when you believe you understand how the markets will react to an economic event, until you hear the actual announcement, you have to define your downside risk, because if the outcome is not what you expected, you can see quick moves in the futures market," said J.B. Mackenzie, managing director of futures and forex of TD Ameritrade, an Omaha, Neb.-based online broker.
One example occurred when crude oil futures (CL) - Get Report dropped by more than $0.50 on November 27 only five minutes after trading began to $45.25, which can affect traders if they did not expect a downward move at the open, he said. On the rumors of a potential deal, the January contract for crude oil on Wednesday is up more than $3.60 to $48.87 , Mackenzie added.
Traders should define their risk prior to placing a trade for both the potential downside and upside moves and be prepared as rumors continue to emerge and affect the markets.
"It is more important to define your risk tolerance when there is more uncertainty," Mackenzie said.
"By defining your personal risk tolerance, you can make adjustments by using futures in your portfolio as markets react to economic news,"Mackenzie said.
A bias emerges when traders believe they received or heard a tip on a company or economic data, falling prey to "first finder biases," said K.C. Ma, a CFA and director of the Roland George investments program at Stetson University in Deland, Fla.
"Just because you heard about breaking news from CNBC, we often have the illusion that we are the only one or the first one to know it," he said. "It will be dangerous to act on it as the market almost always overreacts in the short run."
The underlying asset prices in the futures markets, especially metals, energy and commodities are known to follow long momentum cycles of three to five years, Ma said.
"Even for a mean-reverting market with volatility increasing when approaching the release of important public news events, novice investors with no advantage are doomed to buy high and sell low," he said. "The market volatility can easily whipsaw you out of 2% to 3% a day."
Making fewer trades can be advantageous when equities are in a bull market, said Anthony Crudele, host of the Futures Radio Show in Naples, Fla. Traders need to have the ability to shift gears when the market has less volume and volatility.
"They need to be able to recognize when they should be actively trading or not," he said. "I don't trade as much when the environment is not giving me the opportunity."
When the market is moving slower, traders need to be pickier on their futures trades.
"Don't force trades, especially if you are a newer trader," Crudele said. "They should be coming to you."
Investors who search for trades are only "imposing their will on the market" and the results may be mixed, he said.
Many traders will develop poor habits and force trades when volatility in the market decreases. When the market volatility starts to increase, they wind up mentally fatigued and a lot of times their capital has also been diminished.
"It becomes a vicious cycle," Crudele said. "Great traders don't force trades, they are forced to trade."
Waiting for the better signals in the market could generate better returns.
"You could be rewarded if you wait for what the market tells you to do," he said.
Developing a system and process and understanding what economic factors and other sectors and products affect a trade means investors view each trade as an investment of both time and capital.
"You need to be trained to wait," Crudele said. "I wait more than I trade. Everybody probably overtrades and doesn't have that balance."
Overtrading, especially for novice, retail traders, be a negative strategy, said Mehrdad Samadi, a finance professor at the Cox School of Business at Southern Methodist University in Dallas.
"Research shows that transaction costs increase during periods of volatility, which can significantly reduce the notional return to an investment strategy," he said. "It has also been shown that even large investors such as pension funds and other investment managers reduce trading during these periods."