Volatility, Spreads, ATR & Risk

Managing Risk in Futures Trading

Strategy and Execution in a Shifting Market Environment

Friday, April 4th, and today, Monday, April 7th, 2025, brought a significant surge in volatility across the futures markets. Whether it was equity indices, crude oil, gold, treasuries or crypto, the tempo picked up, and the screens lit up with aggressive flows, wider spreads, and erratic price action.

These kinds of sessions expose the unprepared. But for the futures trader who knows how to read market context and adjust accordingly, they offer some of the best opportunities all year.

Volatility is not something to fear. It's something to manage, adapt to, and use as a lens for how you size, structure, and time your trades. In this piece, we’ll break down:

• What happens to spreads and depth when volatility increases
• How to recognize when volatility is dampening
• Why ATR is a key filter for adapting to market conditions
• How traders adjust risk management and execution in volatile environments

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Volatility & Spreads: What Really Happens

When market wide volatility spikes, spreads widen across nearly every liquid futures contract. This is a direct function of risk and uncertainty, given liquidity providers don’t want to get run over.

Three key things happen:

1. Liquidity providers pull back
   As the speed of price movement increases, market makers and passive players reduce their size or temporarily pull orders, causing the spread to widen.

2. The DOM becomes thinner
   Fewer resting orders sit at each level. What was once a deep, stable ladder becomes fragile and reactive. The best bid and offer flip rapidly, and chasing price becomes expensive.

3. Aggressive orders dominate
   Market participants switch from passive to aggressive behavior. Buy and sell market orders sweep through multiple levels, increasing slippage and creating brief dislocations.

Even instruments that typically hold a one-tick spread can start fluctuating between two, three, or more ticks, depending on the depth and participation.

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When Volatility Dampens

The flip side of a high-volatility environment is the calm that often follows.

Dampened volatility shows up as:

• Tighter spreads
• Thicker order books on the DOM
• More range-bound or mean-reverting behavior
• A noticeable drop in tempo

This often happens post-news, mid-session. Recognizing when volatility is dampening is just as important as knowing when it’s heating up. Elite traders shift execution style in sync with this transition, moving from breakout or trend setups to fade-style trades or reducing participation altogether.

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Using ATR as a Volatility Filter

ATR, or Average True Range, gives you a data-backed snapshot of how much the market is moving on average. It’s not just a number but also it’s a volatility filter.

Why use ATR?

• It helps you understand the current environment
• It allows for smarter stop and target placement
• It gives you a way to dynamically adjust position sizing

Example:
If NQ has a 3-day ATR of 220 points and you’re placing a 15-point stop, you might be underestimating the volatility risk. On the flip side, if ATR drops to 100 points and you’re still using a 25-point stop, you're leaving edge on the table.

ATR should frame your expectations and act as a tool to determine if the market is offering enough movement to justify your trades.

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How Futures Traders Might Adjust for Volatility

The best traders do not use static rules. They adjust based on market conditions, particularly around volatility.

Here are some examples of how they may do it:

1. Risk Per Trade Is Volatility-Aware
   Risk isn’t a fixed dollar or tick value. It’s dynamic. Elite traders may size down when volatility spikes because stop distances need to widen to reflect the current environment. The opposite applies when volatility compresses. The exception to this rule is that others may wish to size up if they believe they excel in these conditions. I know I do as these are my favourite trading environments.

2. Position Sizing Scales With ATR
   Larger ATRs mean you take smaller sized positions and wider stops. Lower ATRs can support slightly larger size and tighter stops, provided liquidity and trade quality are there.

3. No One-Size-Fits-All Stops
   Stops should be based on structure and volatility, not habit. A 12-tick stop in crude oil might make sense on one day but be totally out of touch on another. Use volatility and context to fine-tune each trade.

4. ATR as a Daily Trade Filter
   Some traders use a minimum ATR threshold to decide if they’ll trade at all. For example:
   "If crude’s ATR is under 50 ticks, I cut size or skip the session."
   "If NQ is above 200 ATR, I’ll reduce position size with a wider stop and be selective."

5. Execution Style Adapts With Tempo
   Execution adapts to tempo. In high volatility the tape moves fast and you need to react with conviction and no hesitation. It demands decisiveness, comfort with wider stops, and tolerance for slippage. Precision gives way to instinct. In low volatility execution becomes more surgical with quick entries and exits. Tighter targets and tighter risk. You have to be calm, balanced, and clinical, matching the market’s rhythm without forcing it.

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Final Thoughts

Volatility isn't random chaos. It's information. It tells you how aggressive or cautious the market is, how thick or thin the order flow is, and what kind of risk-to-reward the market is offering.

Friday and Monday reminded us of that. Whether you’re trading ES, NQ, CL, GC, ZN, or in my case BTC, the message is the same in that those who observe volatility and adjust accordingly are the ones who endure and thrive.

Track your ATR. Pay attention to spreads. Use the DOM / Tape to ‘feel’ shifts in behavior. Most importantly, let volatility set the tone for how you manage risk and size.