One of the situations a trader faces in their everyday experience in trading a different kind of markets and securities is when there is volatility in the market. This can confuse an investor as to whether the stock is safe to be bought or sold as a volatility can signal an inevitable rally or reversal in the stock although any market even those not under a volatile trading can be susceptible to sudden plunges or changes in the price direction.
The tendency for the current to suddenly change has always been expected out of markets but the trend being volatile and within a short period of time could lead to unexpected losses. Investors, over time, have come up with strategies and backup plans in cases of fluctuations and reversals.
One way to avoid these losses, aside from practice and a solid knowledge of extreme market conditions, is to come up with a solid strategy that would help a trader or an investor trade in conditions like volatility markets.
How Volatility Takes Place
Trading Sessions which usually turns volatile are driven most of the time by huge price fluctuations and a heavy volume of trading which causes unevenness in the number of buy and sells.
Aside from these factors, a volatile market can also be caused in time frames which are driven by times where a certain market is awaiting major news announcements, economic changes, and changes in the current rating from famous analysts, the effect of an upcoming earnings report or even the actual earnings report. This is led by the market reaction caused by the aforementioned factors with usually results into a mutual decision among traders and investors.
Creating a Volatile Trading Strategy
One way to avoid losses and to place the volatile condition of the market to your advantage is to understand and delve deeper into the cause of the volatility and all the steps you have to take and you have to avoid. A bigger understanding of the situation can give you an insight on the risks imposed on every moved.
A knowledge build on the volatile market condition will result into a strategy that can be used to minimize the losses and risk levels in the steps that will be taken following a volatility trading.
Identify the risks. Given a trading that is prone to a sudden reversal or rally, dividing a list of options into a higher risk or a lower risk could help you easily cross out the steps which could potentially give you higher chances of incurring a loss. Figuring out what actions could give you lesser risk is already a strategy and is one way to gain profit even in during higher levels of volatility.
Take advantage of high volatilities. Setting the direction of your strategy into gaining profits even on high volatility is one step before adapting and using a strategy. Shifting a trader’s focus from riskier markets to those which actually shows profit potential despite volatility can help avoid stocks with weak profit outlooks. Just like any other strategy, a trader must also keep a close watch for breakouts which can lead into an upward trend.
One can also devise a series of strategies which will not follow a short time frame as there is a high level of a sudden rally or reversal in the stock during volatile period.
The use of different indicators one good example of which is the Relative Strength Indicator (RSI) can also be used to support a position one trader is going to take. An advance preparation or a back-up plan at the trader’s disposal is also important to avoid unnecessary actions at the start of a volatile market.
Trading volatile markets can be really risky so traders choosing to go through the path should expect and be willing enough to accept every loss each risk gives off. Traders must also be confident enough to enter high volatility markets and still be open for a chance in getting profits despite the high amount of loss.