Is Volatility Good or Bad for Stock Trading?

There are many concepts, trends and underlying currents that determine stock market movement, trading approaches and strategies. It is important to remember these concepts for online stock trading while also studying charts and studying expert opinions.

An Example of Current Market Volatility

Stock market experts would have noted that on Wednesday morning, January 26, stocks gained, as Yahoo Finance reported. The S&P 500 gained over 2% at its highest point of the day. However, it closed lower, which was a sign of volatility. The Nasdaq too rose by over 3% at its highest point before falling, though it still ended the day in the green. Stocks ultimately ended mixed. Though the eagerly awaited Federal Reserve meeting had affirmed that interest rate hikes would be introduced again as inflation remained high and the economy was recovering, there were “concrete” details missing about the timing of the rate hikes.

Volatility is something investors can’t escape from, and it is something that day traders thrive on. If the undesirable aspects of volatility’s impact happen at the wrong time of your stock’s life cycle - volatility causing a price drop when you’re about to sell the stock or causing a price rise when you’re about to buy the stock - you can make a loss or miss out on an opportunity.

What Is Volatility?

Generally, the stock market is considered to be volatile when it rises and drops by over 1% through a sustained time period, although in the micro-cap world we see much more extreme examples. We often identify volatility with massive price swings either up or down. While volatility may catch investors and traders off guard, it is an essential current powering the stock market. The volatility of an asset is an important factor for pricing options contracts.

Not all stocks are equally volatile. If a stock has a high level of volatility, it means that its price can dramatically change in short periods of time. It could be a price movement up or down. If a stock has low volatility, it shows that its value is more stable and not susceptible to violent price swings, but to lesser swings.

Volatility in Day Trading

Traders trade for profits and, only if a stock’s volatility is significant can you make larger profits. If you buy a stock in the morning for a price and then see it rocket to around double or triple later in the day, you make a great deal more profit than a stock that is more stable. But if that stock is very volatile, it could drop again to where it started the day with. Experienced day traders could either see that coming and move accordingly or set up entry and exit points, by which they would sell the stock when it reaches a particular price point.

It’s true that the opposite could also happen. If a stock’s price drops significantly, then long-biased traders would suffer giant losses. However, before starting trading for the day, traders go through stocks that have risen or dropped early. That can serve as a starting point or guide to select the stocks that have the potential to significantly rise in value. There is always an element of risk with every trade.

Beginners May Want to Avoid the Most Volatile Stocks

That’s why it is always advisable to start with stocks that are less volatile, particularly for beginners to free stock trading. Or you can trade volatile stocks with the appropriate position sizing so that you avoid drastic losses. While stocks with low volatility may give you lower profit margins, you can be shielded from the risk of drastic losses too, particularly when you are new to trading. Accelerated price action could also be unnerving for new traders.

New traders would have to deal with wild emotions such as depression, exhilaration, anger, etc. The roller coaster ride could be hard to take in for beginners. High volatility stocks are susceptible to bad fills and slippage. It is important to be prepared for this since high volatility could go both ways - up, which could be exhilarating, or down, which could be depressing. It depends on whether you are trading long or short.

Mitigating the Risk Factor

• The risk factor must therefore be mitigated by holding positions of smaller sizes.

When you hold positions in various stocks with different levels of volatility, you can balance the volatility. One stock may be extremely volatile. Its price may drop significantly, but you have other stocks that have their prices rising significantly. Some may drop, but not significantly, while others may rise, but not significantly. Swing traders can balance volatility by having multiple stock positions.It helps them make the required adjustments through the day.

• For those who are new to all this, it is therefore a good option to avoid the extreme low floats.

While gains won’t be dramatic, the losses won’t be too, and they would be much easier to bear. For newcomers, it is better to buy familiar stocks.

Tips for Highly Volatile Stocks

Once you gain experience, you can move to more volatile stocks that can give you great returns, with appropriate position sizing to account for the volatility. When you pick highly volatile stocks, make sure you follow certain steps:

• As we mentioned earlier, select entry and exit points

• Use tight stops

• Choose the right size of the position

But if the stock is unfamiliar, it is best to avoid it. High day trading leverage is good for more experienced day traders who can recognize a high-odds probability set up. It maximizes their opportunities.

The Opportunity in Volatility

Volatility could indicate opportunity, as CNBC quotes a saying of Zach Abrams, Shaker Heights wealth management manager. Even if stocks decline from the recent highs they have reported, if they are volatile stocks, it also reveals the possibility that they may rise again and at an astronomic pace and recoup their losses.

This shows that investors must stay calm even when dramatic volatility strikes. Despite the up and down movement of stocks, their long-term returns are based on their earnings growth, dividend yield and valuation changes. It is the same for every stock. Day traders, though, need to act and be ready to enter or exit when volatility strikes since they trade within the day rather than investors who hold positions for long periods.

Advanced direct market access brokers provide user-friendly platforms for day traders to make the most of. They also offer free software and zero commission trading that enable traders to maximize their opportunities.

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