What is Volatility?
Watch for breakouts from consolidations
As long as an asset remains between the support and resistance of a tunnel, no action should be taken. In a volatile market, there is rapid fluctuation in prices. An upside breakout can lead to immediate and considerable high prices. This is the potential that breakouts in a volatile market offer, but these breakouts may change direction and cause severe damage to the price of the asset the trader is long on. So, it is prudent to use stop-loss and take profit orders to limit losses.
Consider shorter-term strategies
During periods of high volatility, one way to take advantage of price fluctuations is to look at quick entries and exits. However, this should only be done if you have the knowledge, experience and time to closely follow the market movements. On the other hand, risk averse traders may choose to wait out times of high volatility and avoid making decisions that could be emotionally driven, such as out of apprehension or fear.
Dealing with Volatility in the Market
1. Diversification of Portfolio
This is one of the most effective ways to manage volatility. Invest in a variety of assets and industries for sustainable and stable results over time. This way volatility in one market will not wipe out all your savings, since its impact will be mitigated by stability in other markets or instruments.
2. Look at the Bigger Picture
Ignore the short-term mayhem in the prices of assets and wait for the markets to stabilise again. It is difficult to determine when to enter and exit during times of volatility and bad timing could further increase your losses.
3. Invest Systematically
If the market has collapsed, some traders see it as an opportunity to invest at lower prices. Instead of trading randomly around market events, professional traders tend to trade on a regular basis and react to what is happening at the time in the markets.
Having a well thought out strategy is the best way to get through periods of uncertainty in the market. If you are willing to take risks, volatility might not be bad at all, as long as you are prepared with the right risk management strategies.
Reference Links
- https://www.schwab.com/active-trader/insights/content/how-traders-can-take-advantage-volatile-markets
- https://www.investopedia.com/articles/02/051502.asp
- https://www.northwesternmutual.com/life-and-money/what-causes-volatility-in-the-markets/
- https://www.investopedia.com/terms/v/volatility.asp
- https://americanfundsretirement.retire.americanfunds.com/basics/volatile-market/dealing-with-volatility.html
