All investors dream of owning stocks that steadily goes up over time. This is possible, but there are certain times that the market simply doesn’t go our way. Even the most stable stocks go through periods of becoming volatile. This behavior of the market is inevitable. It is what makes the market liquid. In this article, we are going to talk about market volatility and how to conquer it.
What is market volatility?
By definition, market volatility pertains to the rate at which the price of a security increases or decreases at a given period of time. It is often measured by calculating the standard deviation of the annualized returns of a certain investment. This shows the range up to which price the security may increase or decrease.
Metaphorically, we can compare the market’s behavior as that of a roller coaster. There is a time it goes straight up, building tension and excitement, then it may suddenly plunge down. However, in this article, we would focus on what’s going on in the middle of riding a roller coaster – its ups and downs. That is the same with the market. It can go on periods of steady upward or downward trends, but it also goes through a series of price fluctuations.
Based on past analysis on the market behavior, the volatility of a stock is roughly 20% in a year and about 5.8% in a month. This does not happen consistently because volatility keeps on changing. That is why we go through some periods of high volatility and low volatility.
Identifying the volatility of the market measures its possible risks. If the price of a security rapidly fluctuates in just a short time span, then it is considered to have high volatility. On the other hand, if the price of a security fluctuates slowly in a longer time span, then it is considered to have low volatility.
If one may ask about the benefit that a volatile market may bring, it is the possibility to enter the market at a low price even when it is steadily going up. It may also provide a window to exit at a very high position since the market tends to reach the highest and lowest peaks during a volatile trend.
Factors that affect the market trend
In short periods of time, market prices tend to move up and down. The volatility of the market is its natural response to certain factors that affect it. These factors may vary from market and company news, economic releases, innovations and introduction of new products, surprising earnings results, and the activities of short sellers and day traders.
How to conquer a volatile market?
The best way to conquer a volatile market is by simply riding it out. By investing for a long-term, you will most likely get out of short-term price fluctuations. Along with this kind of mindset, you need to be unmindful on the temporary changes in the trend. It helps you get away from the emotional challenge brought by the possibility of losing money. Just remember to periodically check your investments so you don’t mistakenly ignore the possible long-term market changes.
For active traders who want to take advantage of a volatile market, short selling is the best choice. However, the risk of making a wrong speculation is even greater than that of a declining market trend because of the unpredictable movement in a volatile market. It is harder to calculate the right time when the trend will make a reversal so active traders should trade at their own risk.
Whichever technique an investor chooses in conquering a volatile market, it is important to keep in mind the risks that come along with it. The best way is still a hold strategy until the trend calms down. If you ever choose to trade during such periods, be mindful on the effect of the present market condition on your decisions.
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