“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffet
What is Market Volatility?
Market volatility means that there is fear or uncertainty about how the markets are going to move. In times of high volatility prices can move up and down a great deal for no clear reason and in times of low volatility prices move up and down slowly over a longer period of time. Periods of low volatility tend to occur when in general terms markets are moving up and periods of higher volatility tend to occur if they are moving down.
A Polarising Environment
Some investors are put off by high volatility and choose to take a very conservative approach to trading. Other investors embrace high volatility and see it as an opportunity to make large gains as the markets swing up and down. The way to trade a highly volatile market is markedly different to trading when volatility is low. As a general rule, when trading in times of high volatility investors will hold positions for a shorter period of time than they would otherwise do and when there is lower volatility they hold positions longer.
Trading online is without a doubt the most efficient way of investing and of maximising potential profits. It’s quick and you can trade using your desktop, your tablet or your mobile phone. Online trading sites offer user friendly platforms that allow you access to hundreds of trading instruments including, options, Forex, shares and commodities. In times of high volatility, you can see market changes in real time, have the ability to place limit and stop orders and access news and data all from one place.
Limit and Stop Loss Orders
Using limit orders when trading volatile markets can be very beneficial. This is where you place an order to buy or sell a specific number of shares at a specific price. Limit orders can be helpful because volatility is often accompanied by high volumes of trading and sometimes this can mean delays in the execution of trades. Exercising a limit order particularly if you are trading online can mean your trades are executed quicker and more accurately. Using stop loss orders is a good way to limit your exposure if things turn against you. A stop loss order will automatically close an open position should it hit a price at which you are unwilling to risk further loss.
Scale In and Out
When you are in a position where you are about to open a position scaling in can help you limit exposure and at the same time give you the opportunity to buy at an increasingly cheaper price. When you scale in, instead of opening a position for the amount of £1000 for example, you buy in increments and so you start by buying £500 and then £250, followed by another £250. If the stock price is falling this leaves you the option of buying incrementally at a lower price or of closing your position having not lost as much money as you would have if you had opened with the full £1000. Scaling out works in the reverse and helps maximise profits while minimising risk.
Trading in times of high volatility can be extremely profitable and using the methods described above as part of a wider trading strategy can help you fight the fear and carry on trading.