It is not a small piece of news that many traders make gains in the stock market on a daily basis. Although the thought of the stock market’s volatility brings fear into the hearts of traders.
Options and stock traders take advantage of the stock market volatility to make lots of profits in a short period of time. However, this move comes with certain risks.
Traders and investors take risks, especially when making decisions that concern finance and money. One of the features of the stock market is that it is extremely volatile; this means that there will be ups and there will be downs.
If you have been trading in the stock market, you’ll know that the prices of shares can be unpredictable. And also, if you intend to invest in the stock market, it is imperative for you to know that the stock prices are not consistent, hence, they change from time to time.
I have come across two different types of traders in the stock market and I would like to highlight these two types of traders in this industry.
First are the traders who absconded from the stock market because they feel that investing their money into stocks is risky.
Secondly, the other set of traders are traders who capitalize on the nature of the stock market to make lots of profits from their trades.
Which type of trader are you? Are you skeptical about investing in stock and options trading because you have been told that you will lose all your trading capital?
The truth is that you can join the bandwagon of other traders who benefit from the volatility of stock prices. In this post, I will share secrets of how successful stock and options traders take advantage of the volatility in the stock market.
What is Volatility?
For you to make a profit while trading stocks and options, there must be a change in the price of the financial assets. The prices of financial instruments change from time to time, the rate at which the price of securities changes is called volatility
Volatility refers to the rate at which the price of a financial instrument increases or decreases for a definite set of returns. Volatility is an instrument which is used to measure the fluctuations in the returns of a financial asset.
The volatility of stocks and options can either be low or high. You can make more money from your trades when the volatility is high. On the contrary, the higher the volatility, the higher the risk.
The volatility in the stock market can be bad news to some traders, however, some set of traders enjoy the market volatility because it helps them to make quick profits on their trades. Whether the market volatility is high or low, some smart and experienced traders take advantage of the volatility to make more money in their trades.
“The sweetness of trading is in the volatility”. When the volatility of a financial asset rises, it creates an opportunity for you to make a profit than what is expected of you to make. However, you stand the risk of losing your trading capital within a short period of time.
The way you manage volatility affects your trading performance and profits. From time to time, the prices of stocks and options adjust from low to high volatility, this is why you need to learn how to handle volatility.
Obviously, traders who benefit from volatility in the stock market are those who know how to handle volatility. If you must be successful trading stocks and options, you must learn to take risks.
People make losses and people make profits while trading in the financial markets. Smart traders are the people who are aware of the risks involved, they don’t make foolish trading decisions, rather, they take well-calculated risks.
Taking calculated risks may not make you a successful trader overnight but it will help you to better your chances of winning and lessen the chances of losing.
One of the sure ways to take well-calculated trading decisions is to estimate the volatility of stock by measuring its standard deviation.
Standard deviation is an instrument that can be used to measure the variance of the historical returns of a stock.
In finance, the higher the variance in the average (minimum expected return of stock) and the return of a stock, the higher the standard deviation.
For instance, if the standard deviation of a stock is relatively high when juxtaposed to others, this means that the actual returns of that stock will be greater than the expected return of that stock. Consequently, this increases the volatility of the stock and makes it riskier to trade.
Measuring the risk of a stock based on standard deviation will be helpful in providing insights for the trader and this can help you to identify the right stocks to invest.
However, it is imperative for you to know that these estimations are strictly based on historical data and previous market trends, they do not reflect on the future performance of the stock.
How Can Stocks and Options Traders Benefit From The Volatility In The Stock Market?
Stock and options traders can really take advantage of the volatility in the stock market. Traders need to be guided and be disciplined especially whenever it concerns the market volatility. The following are ways you can capitalize on the volatility in the stock markets.
1. Focus on Stocks That Are Doing Well In The Market
If you are trading in a volatile market like the stock market, you need to focus on the stocks that are actually doing well in the market. A good way to make profits is to look out for stocks that have a good market record. These stocks allow you to generate profits quicker than normal markets.
Trending stocks are assets that follow the same movement or have been moving in one direction. The trend of the stocks may increase for a long time before it starts declining.
You can benefit from the volatility in the stock markets by identifying trending stocks whose prices are moving in the direction of the overall market.
In doing this, you are likely to make money as long as that particular stock continues to move accordingly to a specific trend.
What most smart traders do is to look for a stock that has an upward trend but hasn’t accelerated in price.
For instance, when there is volatility, some traders in the stock market acquire stocks which the price values has been dropping but hasn’t lost fundamental/book value. Their trading goal is to cherry pick these stocks before the prices accelerate and not after price picks up.
2. Prepare Yourself, Have A Plan
One of the ways traders can benefit from the volatility in the stock market is to have a trading plan. Just before you make the decision of trading in a volatile market, you need to prepare yourself.
A plan does not only keep you focused but it also helps you to achieve your goals as a stock and options trader.
Trading stocks and options are not a game of gambling; rather, they are a mental game that requires 100% of your concentration.
A well-defined plan will help you to be focused and monitor your trades constantly. Therefore, if you have a plan, you will be comfortable even when the volatility is high.
Moreover, a great trading system creates a friendly trading atmosphere and it removes fears, doubts, and panic from your mind.
Also, ensure that you adhere to the tactics and strategies outlined in your system.
3. Small Capital
Another advantage enjoyed by stock and options traders is that they don’t necessarily need to get large trading capital to trade in the volatile market.
You can start trading options and stocks with small capital. The volatility in the stock market helps traders to make more than their initial investment or trading capital. Likewise, you can start trading options and stock with little capital and get experience on how the volatile market work.
Investing large sums of money for trading can become risky and most traders may feel that they may lose all of it. Instead of investing larger amounts of money for trading, you can reduce the risks of losing all your money by investing part of the money to trade.
Also, you don’t need to trade too many stocks, focus on trading a few stocks.
4. Market Environment
Lastly, another benefit enjoyed by stock and options traders is that they do not need to trade every day to make money.
It has been proven that day traders perform well in volatile market environments. The volatility in the market creates more opportunities for stock and options traders to make lots of profits trading in the market.
Don’t gamble on trading stocks and options. Since you know that the stock market is extremely volatile, you need to be guided when trading. Learning how to handle volatility in the stock market would be a great advantage to you as it comes with lots of great benefits.
Furthermore, smart traders make money from the stock market volatility, if you want to make money like the smart traders, you need to be aware of the risks involved.
Surely, trading stocks and options can be risky. One of the mistakes most traders make is that they are not aware of the trading risks. You need to be aware of the risk you are taking. Also, you must have a definite plan on how to deal with the risks involved.