Should you trade when the market is volatile? How do you trade during market volatility? How do you profit from market volatility?…
The financial market is constantly changing and unpredictable, and market volatility can be a major challenge for even the most experienced traders and investors. In this post, you will learn how to trade during market volatility.
We will also highlight various factors that contribute to market volatility, how it affects the prices of financial instruments, and provide practical strategies to help traders and investors trade in the financial markets during market volatility.
What Causes High Market Volatility?
Market Volatility is a measure of the speed and extent to which the prices of financial assets rise or fall over a given period of time.
High market volatility means that prices are rapidly changing and can experience significant swings in short periods, while low market volatility indicates more stable price movements.
Here are five common factors that determine high market volatility:
1. Economic indicators like inflation, GDP, and employment data.
2. Global events like political instability, natural disasters, and conflicts.
3. The overall mood of investors can impact the market.
4. Company news like earnings reports, product launches, and other company news can affect stock prices.
5. Changes in interest rates or monetary policy decisions by central banks can impact the market.
Types of Market Volatility
1. Historical Volatility
Historical volatility measures the amount of volatility that has occurred in the past, based on the price movement of an asset.
2. Implied Volatility
This measures the expected volatility of an asset, based on the prices of options contracts.
3. Seasonal Volatility
This is the probability for a particular financial asset to have increased volatility during certain times of the year.
4. Event-Driven Volatility
This type of volatility is caused by specific events such as earnings announcements, mergers and acquisitions, or geopolitical events.
5. Cyclical Volatility
Cyclical volatility is all about the natural fluctuations in the market that occur over an extended period of time, usually due to changes in economic cycles.
How Does Market Volatility Affect Market Prices?
Well, it’s not so hard to see.
During periods of high volatility, traders and investors become more uncertain about the future of an asset (stock, currency, coin, commodity, bond) and the economy as a whole. This can make them want to sell all their shares, even at a lower price.
Now let’s look at it from another perspective.
If the traders and investors are hopeful and they hold on to their assets (with faith that they will increase in value in the near future), others will be prompted to buy more of that asset, even despite the market volatility. In such a case, the market price will increase.
Strategies for Trading During Market Volatility
1. Asset Diversification
By diversifying, you are not relying on the performance of any single investment to generate returns. For example, instead of investing all your money in one asset, you might invest in multiple stocks, bonds, commodities, currencies and coins from different countries and industries.
In the event that a market price fails, other stocks and assets will be left untouched. You can read one of our recent blog posts where we summarized everything about asset diversification here.
Suggested For You – How to Diversify Your Trading Portfolio
2. Dollar-cost Averaging
This is another strategy you can use to trade in the financial market during market volatility. It involves investing a fixed amount of money at regular intervals, regardless of market conditions.
This can help you avoid the temptation to buy or sell based on short-term market movements and instead focus on long-term investing goals.
3. Stop-loss Orders
A stop-loss order is very useful during market instability. As a trader or investor, you can set your broker or trading platform to automatically sell an asset or other assets if it falls to a specified price.
For example, if an investor owns shares of a stock that is currently trading at $50 per share, he/she may place a stop-loss order at $45 per share.
If the stock falls to $45 or below, the stop-loss order would automatically trigger, selling the shares and limiting the investor’s potential losses.
Recommended – How to Deal with Trading Losses and Learn from Them
4. Fundamental Analysis
Here’s another good strategy that traders can use to trade during market volatility. Fundamental analysis involves evaluating the economical activities of a country, financial stats of a company, including details like earnings, revenue, and debt levels, to help determine its long-term potential.
Using this strategy, traders and investors may be better positioned to trade in the financial market and get profits in spite of market volatility.
5. Technical Analysis
Technical analysis involves the use of charts and other tools to analyze stock price trends. Technical analysis can be quite useful during high market volatility, as it can help traders and investors identify potential buying and selling opportunities.
Mistakes to Avoid When Trading During Market Volatility
1. Avoid making impulsive decisions based on short-term market movements.
2. Don’t put all your eggs in one basket – diversify your portfolio to manage risk.
3. Keep an eye on company fundamentals and financial health, even during volatile times.
4. Avoid trying to time the market – instead, focus on a long-term investment strategy.
5. Emotions can lead to irrational investment decisions – stay level-headed and rational.
6. Have a clear investment plan and stick to it, even when the market is volatile.
7. Be patient and avoid making hasty decisions based on fear or anxiety.
8. Don’t prioritize short-term gains over long-term growth potential.
9. Monitor and manage risk by setting stop-loss orders and regularly reviewing your portfolio.
10. Seek professional guidance or advice when needed to make informed investment decisions.
Market volatility can be intimidating for many traders and investors, but it’s important to keep a long-term perspective and stay focused on your investment goals.
By following the strategies in this post; like setting stop-loss orders, diversifying your portfolio, and having a clear investment plan, you can manage risk and ensure that your investments are positioned for long-term growth.
With a disciplined approach and a commitment to sound investment principles, we traders and investors can survive market volatility and achieve our financial goals over time. Cheers to continued success!