For some traders, volatility means uncertainty, while for others, it means opportunity. Neither side is wrong, in fact, they can both be right. The main difference is, when it comes time to act, some traders will hesitate, while the others will load up and fire away. Remember though, just because you’re trading a market that’s moving like crazy, doesn’t mean you’re guaranteed to make any money. It does, however, give you the confidence of knowing that if you do make a losing trade, at the very least you’ll have a chance of making your money back on the next move.
So, what is volatility? According to Investopedia, “volatility represents how large an asset's prices swing around the mean price - it is a statistical measure of its dispersion of returns.” In other words, volatility represents the speed and size of price movement. The higher the volatility, the bigger and faster the moves are. The lower the volatility, the smaller and slower the moves are.
Here’s What Our Coach’s Have To Say About Volatility
Fear vs Greed
The most universal indicator of volatility we have is the VIX, which is a measure of S&P 500 options premium. Last month we saw the VIX move above 80, for the first time since the 2008 financial crisis, while the stock market plummeted. It’s a real gauge of the amount of fear and confidence in the market, so it’s a good idea to keep a close eye on it.
Big swings can be your best friend or worst enemy. If you can't control your emotions and manage risk, then you’re on the fast track to blowing out your account. It’s never a bad idea to take a step back and evaluate the environment you're trading in, and always make sure the level of volatility in the market you’re trading is suited to your strategy.
Would you prefer trading in a high or low volatility market? (Please answer in the comments)