It has not been assessed whether
investors can save capital in high volatile markets or not. But, at the same
time volatility allows investors to make big money, but also there could be
high risk. When volatility surges, there could be a probability to generate an
above-average profit, but you also run the risk of losing a larger amount of
capital in a quick time.
Following a disciplined approach, you can manage the volatility of markets for your benefits while reducing risks. Here are four steps you should consider while trading during market volatility-
Define your goals and strengthen your defenses-
Before trading in volatile markets, ensure you are mentally and strategically ready to manage the increased risks involved. Therefore, the first step is to ascertain that-
You are comfortable trading when
markets are highly volatile.
You address the potential for
significant loss of capital and are ready for this extra risk.
Assuming you are “prepared for action”, the next wise thing to do is to relook at the risk-control measures you have as part of your plan of trading.
Two significant considerations that matter here are position size and stop-loss placement. In the times of volatile markets- when intraday and day-to-day price fluctuate are generally greater than normal-some traders place smaller trades and also use a broader stop-loss than they would when markets are calmer.
The objective with these two adjustments is to strive to avert getting stopped out because of a wider-than-normal intraday price swing while venturing to keep your overall risk exposure about the same. Like always, traders should keep a note that stop orders can be implemented far away from the stop price during a big price gap or rapid market volatility.
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Focus on trending stocks-
In spite of higher volatility in markets, there may still be stocks that show firm trending activity- although with a potentially higher degree of risk. A buyer in this condition should find a stock that has been trending higher but hasn’t accelerated the pace of its advance. Similarly, short-seller trading in a volatile condition should chase a stock that has been declining but hasn’t already seen a collapse or “waterfall” decline. The objective is to get it before a price accelerates or declines in the short seller’s case, not after.
Keep checking for breakouts from consolidations-
One common trading methodology that is used by most traders is “buying the breakout”. Using this approach, a trader keeps checking a stock that’s trading inside an identifiable support and resistance range.
As long the stock stays inside
that range, the trader does nothing. Although, if the price breaks that range,
the trader will look to purchase the stock instantly in hopes that the breakout
indicates the start of a new up-leg for the stock.
Consider short-term strategies
The last, but not least approach that some traders use in volatile market conditions is to adopt a short-term trading strategy. This typically includes striving to take profits- or at least lock in profits- more quickly than usual.
Conclusion- In general volatile market conditions look risky, but there is good potential for earning profits in these times. You can consider using these above-mentioned steps to find good profit with a lesser margin of risk. These steps have been used by some traders as well.
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