Prices are always moving in financial markets, which is a good thing as traders wouldn’t be able to make money in the market if prices never changed. At times, prices in the market move faster than usual. The degree or speed of the price change is called volatility. As Kavan Choksi points out, with the increase in volatility, the potential to make more money fast also goes up. However, this also increases the risk involved in the trade. As volatility spikes, it can be possible to generate above-average profits. However, one would also run the risk of losing a larger amount of capital in a relatively shorter period of time. It is important to stay disciplined and maintain the right approach to take advantage of volatility, while minimizing the risks involved.
Kavan Choksi talks about the approach to take advantage of market volatility and make profits
Prior to attempting to trade in volatile markets, one should make sure that they are both tactically and mentally prepared to manage the increased risks involved. They should be comfortable trading when volatility is high, and recognize the potential for significant loss of capital. Anyone wanting to trade in volatile markets should double check the risk-control measures included in their trading plan prior to getting started.
Stop order placements and position size are two important considerations when investing in a volatile market. After all, stop orders can help protect an unrealized gain or limit potential losses on an existing position by enabling a trader to set price triggers for stock sales. Many traders place smaller trades when the market is volatile. This basically means that they commit less capital per trade and choose to set their stop prices further from the current market price than what they would have done in calmer times. The overall goal is to keep the overall risk exposure to almost the same level, while reducing the chances of getting prematurely stopped out due to wider-than-normal intraday price fluctuations. A trader should always keep in mind that stop orders can be executed far from the stop price during a big price gap, as well as during rapidly changing market conditions.
The volatility of the market does not essentially erase trends. There are certain stocks that might continue to move in a particular direction, even if they may have a potentially higher degree of risk. For a trader, it is vital to find stocks that have been trending higher at a steady pace but has not rocketed upward. They need to leverage the stock before price acceleration. In a similar manner, while doing short seller trading in a volatile market, one should that has been declining but hasn’t yet experienced a collapse.
As Kavan Choksi points out, it is common for traders to try to “buy the breakout”. This means that they wait for a stock to move through an identifiable support and resistance range. The breakout trader does nothing as long as a stock remains within that range. But in case the price breaks through the resistance level, traders shall try to buy immediately in hopes that the breakout signals the start of a new sustained move upward.
