The statistical estimate of the returns of dispersion for a market index or given security is known as Volatility. It can be often measured as a variance or the standard deviation. It is said that the lower the volatility, the less risky will be the security and if the volatility will be higher, then the security will be riskier. Volatility shows the constant upward and downward movement of investments. Volatile Market Meaning: When the stock market falls and rises more than one percent during a sustained period, it is known as a volatile market. There are different ways to measure the volatility of markets such as standard deviation of returns, beta coefficients, and option price models, etc.In this article, we will discuss if the market volatility is good or bad.
The market volatility is referred to as tricky due to the continuous changes taking place in the stock market. The higher volatility indicates higher risk. It is a situation in which the major indexes drop by 20% giving the warning signals to bear the market. Recently, it was heard that one of the longest bull markets index dropped by 20% and was transitioned into a bear market due to the pandemic coronavirus. Forex trading is one of the best trading markets to get aligned with.
Without any doubt, we can conclude that there are even better sides of Volatility. If the stocks rise in the investments you have made, there will be a spike in the prices. One of the greatest benefits of volatility is that the extreme strikes are never downward towards the bear market territory, but are always in the upward direction.
Also, one can avail of the buying opportunity if he feels that there must be a bounce back, that comes with the dropping of the stock prices.
With the above-mentioned statements, we can conclude that market volatility is neither very good nor very bad. It completely depends on the investment that has been made, giving the investors a chance to sell high and buy low or by keeping the money moving.
Steps to take advantage of volatile markets:
- Define your objectives: It is very important to be mentally and tactically prepared before getting involved in a trade volatile market. You should know the risks involved with it to manage it efficiently. You should always prefer your comfort zone during trading, in high volatility. Revisiting the measures to control risk is supposed to be a part of the trading plan after you are ready to take the action. The major objective should be to continue even after the intraday price fluctuation. If there are rapidly changing market conditions or a big price gap, the stop orders could be executed distant from stop prices.
- Focus on stock trending: trading in volatile markets can be beneficial, as it allows the trending stocks to see the increasing trend rate. In such cases, the trader may receive information regarding the stocks trending in the same way of the entire market. With such information, he could easily generate larger revenue. A short seller who has been trading in the volatile markets should choose the declining stock that has not yet faced collapse.
- Look for breakouts : “buying the breakout” is the most common method of trading that is carried by most traders. In this system, a trader looks for a stock that is trading within a resistance range, and an identifiable support.No certified action is taken till the stock remains in the range. Hence, the trader will immediately buy the stock if the prices break out to the upside.
- Consider short-term strategies: You should always follow small defined strategies such as:
- Activating a trailing stop sooner than normal or using a tight trailing stop than normal.
- Set a specific profit percentage target.
- Use an oversold/overbought type indicator and sell on the signal when the security is overbought.
- Set the strategies to generate additional profits by selling part of the profit-taking position and holding the remaining position.
In the long run, you can never make money without price changing even if you are one of the long-term investors. We can easily speculate in the market with volatility. In the short run, the profits and losses can be much bigger if the volatility is higher and vice versa.