Today we’re going to talk about volatility and how you can use it to make more money in the stock market.
Volatility is a statistical measure of how much the price of an instrument fluctuates over a specific time period. In more simple terms, volatility measures how moody the market is. Do prices trend in an orderly fashion or do they fluctuate like a rollercoaster?
Normally higher volatility is associated with higher risk. But higher risk also means more opportunity. How risky volatility is to you, all depends on how your portfolio is constructed and your individual strategy.
There are many different factors that influence volatility. If we’re talking about volatility in individual stocks, then things like earnings, mergers, and other one-off announcements may inject some volatility into prices. If we’re talking about overall market volatility, then things like interest rate changes, geopolitical events, and Trump tweeting can all add to volatility.
Volatility is important because it lets you compare the “personality” of each of your stocks. The higher volatility a stock has, the more crazy it will be. The lower the volatility a stock has, the more boring it’ll be. By comparing volatility you’ll have a better idea of what kind of deal you’re getting into.
For a long term investor, the holy grail is a stock that keeps rising with as little volatility as possible. That’s why 2017 was a really easy year to invest in. The markets kept going straight up without any major volatility.
But on the other end of the spectrum, short-term traders NEED high volatility. If volatility is too low, and markets are slowly trending in one direction, then traders don’t get the opportunities to capitalize on each up and down swing.
Volatility is also really helpful in sizing your positions. If market volatility is high, you may decide to use wider stops with a smaller position size. And if market volatility is low, you may use tighter stops with a larger position size.
Watch the video above to learn more!
Stay Fallible investors!