Making money on volatile stocks

Most investors understand that the stock market is volatile, but they may not know exactly what that means. Basically, volatility moeny the full range of price changes that a stock experiences over a specific period of time. But if the price moves a lot, reaching new highs and lows during the time frame, its volatility is high. Yes, all stocks have some volatility, but some are more volatile than. True volatility is measured by a mathematical formula that takes into account the return on equity in the stock and the return on equity of the market as a. This formula shows whether a particular stock has more, less or the same volatility as the market as a. There are also ways to track overall volatility in the market. However, volatility is relative. Stock prices move up and down every day, so not every movement is noteworthy. In general, VIX values that are above 30 are linked to large amounts of volatility in the market and signify increased uncertainty, in and fear among investors. VIX values below 20 reflect more stability.

Stock Market

Volatility is not a quality most investors look for when making an investment, but a segment of speculators — known day and swing traders — do rely on short-term volatility to earn a profit. Trading in volatile stocks is risky, however, because price movements become increasingly unpredictable as the time needed for exacting a profit shortens. In addition, trading on volatility requires that more positions are entered and exited, often counting into the dozens within a period of days or weeks. This means that traders must be efficient or they risk having transaction fees gobble away hard-earned profits. Fear, greed and uncertainty drive this mentality, and it is one of the most difficult aspects to overcome when trading volatile stocks. To avoid trading on emotion, and falling victim to herd mentality, professional traders rely on well-developed trading systems. Trading systems are constructed from a collection of rules designed to enable the trader to locate and enter high-probability trades. There are no sure bets in the stock market, so professional traders inspect technical and fundamental criteria to locate behaviors and conditions they believe to be probable, recurring and profitable to trade on in the future. From this analysis, rules can be created that signal when it may be ideal to enter and exit positions in a stock.

There are numerous reasons for volatility in the stock market and it should be accepted as the underlying reality of investing.

The final step is extensive testing of the system, usually against historical data or simulated markets. Because of these chaotic price movements, traders must use tools that allow them to profit on movements in either direction. Leverage is another tool used by traders to maximize returns on short-term trades, as it allows a trader to profit even from small movements in the security. Options provide the right for an investor to force the option’s creator to either buy or sell the underlying security at a specified price, based on the terms of the option contract. For a small price, known as the option’s premium, a notable profit can be earned, but only if the stock’s price moves enough before the option expires. For this reason, volatile stocks are considered desirable by stock-option speculators. Many investors make poor trading decisions because of fear and greed. Trading Systems Trading systems are constructed from a collection of rules designed to enable the trader to locate and enter high-probability trades. Leverage Leverage is another tool used by traders to maximize returns on short-term trades, as it allows a trader to profit even from small movements in the security.

Trading Systems

Day traders often focus on high-volume stocks that are seeing significant price movements, because those stocks offer the best opportunities for making money quickly. You can use screeners in different ways to find stocks that often experience lots of price volatility on high trading volume, ones that are likely to be volatile and highly traded on a particular day, or ones that are showing volatility during a certain time of day. To search for stocks that routinely display high volatility and heavy trading volumes, go to StockFetcher. If you’re on StockFetcher, click New Filter and copy and paste the following lines into the pale-yellow area:.

Look for stocks with steady returns and few wild price swings

For example, in April , Apple showed a beta of 1. It is often used to determine trading strategies and to set prices for option contracts. Volatility refers to the upward and downward movement of price. Budget This would fuel the real estate growth story in Take the opportunity to move out of equities and invest in debt until an upward trend is established.

Investor Psychology

Switch to Hindi Edition. Advanced Technical Analysis Concepts. Stock Market. Company B low volatility :. A balanced approach such vooatile this will help play market fluctuations more effectively. Partner Links. Buy at the lower and of the range and sell at the upper and of the range.

Setting Up a Trading Plan

Investors looking for solid, steady returns over a long period of time should generally avoid stocks that have wild changes in value. When a stock goes up and down in extreme fashion, it can be harmful to overall long-term returnsnot to mention the emotional toll that wild price mpney can have on an investor.

Stocks with high volatility are especially risky for investors close to retirement age—the possibility of losing money quickly is combined with a lack of time to recover any losses.

The annual returns of this second company look stoc,s different than Company A’s, but the annual average return is the. So, why does this matter if the returns average out the same? It has to do with the compounding value of an investment, and how big changes in annual returns can have an abnormal impact on the money.

Watch how volatility affects the total amount of money you’ll have at the end of each year, based on the returns. As you can see, investors stlcks Company B have more money at volatiel end of the five years than those who invested in Company A. Fortunately, there are specific measurements that help investors get an objective sense of a company’s volatility. When listing stocks, most online brokerage firms will show the beta for a company, but you should also look for the beta for that industry.

In many cases, online brokers and financial sites will include this stodks, as. This is important because it provides more stlcks for the company’s beta. For example, in AprilApple showed a beta of 1. However, the average beta for the information technology industry as a whole at kaking time was 1. While Apple was slightly more volatile than the stock market in general, it was substantially less volatile than most other tech stocks. As the Apple example above shows, some sectors and industries are, by nature, less volatile than.

Tech stocksfor example, tend to be more volatile voltile utilities. Many financial advisors point to the consumer staples monet as one with low volatility and strong returns. This sector includes companies that produce essential products that we use every day, such as household items, food, and beverages. Since the products are considered essential, sales stay stcks consistent, as do the companies’ earnings and stock prices.

Over the years, there have been a handful of stocks that have garnered consistent, positive returns without wild changes in value.

Many of them are well-known companies that have come to dominate their respective industries through decades of strong performance. They include:. The Balance does not provide tax, investment, or financial services and advice. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. Stocks Understanding Stocks. By Tim Lemke. Company A high volatility :. Company B low volatility :. Continue Reading.

After a relatively calmthis year has seen the return of an old but not completely forgotten market phenomenon— volatility. While the return of volatility may be bad news for some, experienced day traders can generate profits whether the market goes up or down, but that means following a strategy. Below are 10 tips, according to MarketWatch, that aspiring day traders should factor into their respective strategies. As experience is gained and less mistakes are made, investing larger amounts of money becomes less risky.

Finding High-Volatility Stocks

Open a real account to get exposure to the real psychological effects of surfing the market waves. Take it slow and easy, thinking carefully about each trade, and the intuition for good trades will eventually come. Confidence is good, but overconfidence can break the bank. Maintaining a reserved humble attitude will more likely lead to consistent profits in the long run. Follow your trading strategy not your emotions. Losing can eat away at your confidence, while winning can lead to overconfidence. If making money on volatile stocks stick to your strategy and routine, emotions will be less likely to affect your behavior. As already mentioned, trading is a mental game and requires significant amounts of concentration. When positions are opened, they need to be constantly monitored.