Understanding Volatility Ratings: What 1-10 Really Means

Every trading session gets a volatility rating from 1 to 10. This is not a buy or sell signal -- it is a forecast of how much the market is likely to move. Think of it like a weather forecast: a "7" does not mean bullish or bearish. It means expect wide ranges, bigger swings, and the need for wider stops. The scale breaks into three zones: 1-3 (Quiet): Tight ranges, low movement. Scalpers thrive, but swing traders may find nothing to work with. Stops can be tighter. 4-6 (Normal): Typical daily movement. Most strategies work as designed. Standard position sizing applies. 7-8 (Elevated): Wide ranges, real opportunity but also real risk. Consider reducing position size or widening stops. Event days (CPI, FOMC) often land here. 9-10 (Extreme): Rare, event-driven sessions. Massive moves possible in both directions. Many experienced traders sit these out or trade at minimum size.

The rating answers one question: what kind of day is it? From there, you make three decisions: 1. Strategy selection: Mean reversion works in quiet sessions. Trend-following works in elevated sessions. Using the wrong strategy for the conditions is the most common mistake. 2. Position sizing: A rating of 3 and a rating of 8 require completely different position sizes. If your normal size is 2 MES contracts on a rating-5 day, consider 1 contract on a rating-8 day. The expected range tells you how wide your stops need to be. 3. Session selection: Not every day is worth trading. If the rating does not match your strategy, sitting out is the most profitable decision you can make.

The rating does not predict direction. A rating of 8 means big moves -- it does not say which way. It does not tell you where to enter or exit. It does not replace your trading plan. And it is not right every time: about 3 out of 4 forecasts land within 1 rating of actual. The other 25% is irreducible uncertainty that no model can eliminate. Use it as one input in your decision process, not the only one.

The overnight session (ETH: 6 PM - 9:30 AM ET) and the regular session (RTH: 9:30 AM - 4 PM ET) behave very differently. ETH is thinner, more gap-prone, and driven by overseas markets. RTH has full institutional participation and reacts to US economic data. A quiet ETH can precede an explosive RTH and vice versa. That is why each session gets its own independent rating.