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The stock market does not always move in the same direction, sometimes it is in an up trend, sometimes in a downtrend and sometimes remains volatile making it difficult to trade. In bullish or bearish mode, creating a trade position is less risky, as you know the market is moving in a single direction but in volatile market conditions it is unexpected where it will settle.
In volatile market conditions, the index moves in both directions with long gap and swings with uncertain movements. Either it can end in the negative zone or settle at the positive zone, there are equal chances of moving in both directions. In such volatile market conditions, you cannot trade without a proper strategy to minimize the losses and maximize the chances of profits.
The term volatility in the stock market directly refers to the magnitude and frequency of movement of price (index) in both directions (up and down). And the high frequency of price swings means the volatility in the market is higher.
While, on the other hand when the price of the market index remains stable not moving with more frequent ups and downs, then it shows volatility is low. The main reason for high volatility is uncertainty in the market with other factors like seasonality, cyclicality, market speculation, and unexpected events that also affect the market movement.
Apart from seeing the price movement on charts, you can also calculate whether the market is volatile or not. In charts, you can clearly the huge difference between upper and lower swings with both side’s significant movements showing the volatility in the market.
You can also measure the market volatility by finding the standard deviation of price changes over a period of time. The statistical data in terms of standard deviation shows the level of volatility over a period of time. Hence, you can calculate by taking the standard deviation and multiplying that by the square root of the number of periods.
To know whether the market is volatile or not, you can check data volatility index (VIX) data that contains a value in terms of percentage showing the level of volatility in the market. Usually, when the market is not volatile, the VIX is around 10% and when the volatility increases, it may go up to 20% and in certain extreme conditions it can touch around 30%.
However, it is difficult to gauge how much volatility is called a highly volatile market, as for different market indexes or different underlying securities the VIX could be different due to their composition and type of underlying security fluctuating on various economic activities.
The best way to know the market is volatile, take the average VIX of the index for a few months and compare it with the last few trading sessions of VIX. If the latest VIX is trading above the average VIX, then you can consider the market is volatile. Otherwise, to project the volatility for future price movement, you have to use the implied volatility that is calculated differently.
For long-term investors, volatility doesn’t matter, as they wait for months and many years to increase the value of their investment. But for intraday or short-term traders, volatility is risky and also provides a trading opportunity to earn profits in a short period.
High volatility means higher risk but having a higher potential of giving returns. While low volatility means low risk and lower returns. Hence, you should take the highly volatile market as an opportunity to trade with a high potential of getting quick returns.
Trading in a highly volatile market could be risky, but you have to take it as an opportunity and convert this high-risk opportunity into a profitable reward. Yes, for a volatile market, you need to be very careful to trade in a highly disciplined manner and follow some rules and strategies to pick the right stock at the right time and book the profits timely.
During high market volatility, betting on trending stocks can give you some opportunity to book profits. As such stocks move in the same direction, even if the market is volatile, and that may be due to corporate actions, and strong fundamentals of the company. But you have to find out the best-trending stocks from the trending sector that is suitable for trading.
The stocks trading in the range breakouts give a wonderful opportunity for the traders to create a long position and take advantage of such price moves. Similarly, when the market is volatile and trading in the upper and lower range and suddenly breaks out from this trajectory, it is a good opportunity to enter into a long position that could be volatile in the market.
While trading in a volatile market, you need to stay updated with news, events, economic data and other activities like political factors that can influence the market movement. Because when volatility is high, the market is also very sensitive and overreacts to such news and events. Hence, keep an eye on such news and enter into trade positions accordingly.
In a highly volatile market, if you start doing research like performing fundamental analysis or spending too much time on technical analysis and using multiple technical indicators to point out the buying and selling points, you can miss the opportunity.
Yes, for trading purposes always filter or screen some stock in your watch list, while trading don’t waste time on research and stock selection. As every single move is important and owing to high volatility the market index or stock can move rapidly eating your profit margins. Hence, grab the stock you find at lower eves, or having the momentum.
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