In the financial market, volatility is the measure to know how rapidly a particular stock or the entire stock market tends to change over a period. It reflects the constant up and down in securities’ prices. Highly volatile securities are often considered riskier than less volatile securities as the price cannot be predicted easily. Traders take advantage of volatile markets whereas investors are afraid of it as a nightmare. Factors such as taxes, inflation trends, interest rates influence the stock market volatility.
Tips for a highly volatile market
Experts say that high market volatility is an indicator of a big drop and a potential bear market. There are various strategies that enable a trader to earn profits even after a change in price direction. Following are the tips and aspects a trader should consider in the volatile market:
Choosing An Order Type
It is very important to choose the right type of order when the markets are highly volatile. You can execute a market order anytime easily but in volatile markets, you have to consider at what price you are getting the stock because there can be a significant difference in the price that was quoted and the price at which you are getting the stocks.
A limit order is your friend in a volatile market for day traders. You may find that limit orders are slightly higher in cost than market orders. But through limit order, you will be able to fix the price at which securities will be bought or sold.
Whenever you open a Demat account, check the speed and capacity of the trading integrated system provided by your broker. Traders may face difficulty in executing their trades if the trading platform is not advanced enough. This is because of volatile market witnesses high volumes of trading.
Small is smart
Day traders should execute small orders to deal with stock market volatility. You can limit the losses by limiting the trade volume.
In a volatile market, marketers use Straddle Positioning mainly for options where a trader can take the position of a product in two categories simultaneously. For example two options simultaneously – out-of-the-money call and an out-of-the-money put. This position is called a “strangle”. This helps traders to succeed in trades regardless of up or down in the market.
Trade one or maximum of two stocks
Focus on trading one or two stocks maximum and learn about their trading traits. Do not even watch so many stocks daily. The more stocks you watch and trade, the more confusion and chaos it will create when the market turns against you.
Gratify with small profits
Traders cannot make the right decision in greed. Be satisfied with your minimum average daily gain. Get rid of being distressed over the profits you could have made because you need to be a disciplined trader even in volatile stock markets.
Refrain from practice accounts
You should trade for real. Open a real account to experience real psychological effects of trading in the stock market. Practice accounts are not realistic. Forget those practice accounts. Trade small to experience real emotions of losses and profits without severe financial damage.
Volatility is an inherent characteristic of the stock market. Some traders might want to stay away and minimize the risks while others would like to explore methods to benefit from the price fluctuations. The decision to participate in a volatile market depends on one’s individual goals and preferences. Risk management is the key to survive in a volatile market. To manage the risks, you can buy or sell stocks in an incremental manner.