Volatility
The stock market offers a vast array of opportunities — thousands of assets to choose from. Which ones should a trader focus on to trade profitably? Some prefer stable stocks that behave fairly predictably and deliver small but steady returns. Other traders pick a few highly volatile stocks and trade them intraday, aiming for substantial profits. The second approach is more complex, as intraday trading requires constantly searching for promising stocks and closely monitoring their volatility.What is Volatility
Before discussing the potential implications of volatility for market traders, it is important to understand what it actually is. Using as few long or complex terms as possible, volatility can be described as a statistical measure of how much the price of an instrument fluctuates over a given period of time.
If we explain it even more simply, volatility is a measure of market sentiment. It shows how the market behaves — calmly and steadily, like a lake on a summer day, or turbulently, like the ocean during a storm. On a chart, low volatility appears as a slow, straight price movement, while high volatility makes the price line resemble a roller coaster.
Each stock has a different level of volatility. Some move on average by 0.5% per day, others by 1% per day, and some by 5% or more. The choice of stocks depends on a trader’s trading style, reaction speed, psychological traits, and the conditions offered by their broker.
Most traders consider daily price movements of 0.5–2% acceptable. Some traders prefer larger price swings (5% or more per day) to make quick, substantial profits — of course, this requires good reflexes, the ability to use technical analysis data, and a broker that guarantees instant order execution.
Is Volatility a Problem?
Volatility presents trading opportunities. For a trader to make money in the financial markets, there must be price movement. Fortunately, price movement on the markets is constant. However, trading prospects depend on the range within which the price moves. Sometimes the market is relatively calm, with the price moving slowly and steadily in one direction. But more often, prices move at an above-average pace.The good news is that as volatility increases, the potential for faster profits also rises. The bad news is that higher volatility also brings greater risk.
Simply put, if a strong trend develops on the chosen timeframe, a trader can make good profits in a relatively short time. However, in a volatile market, they are just as likely to lose a significant portion of their trading capital very quickly.
What Influences Volatility
There are many factors that can influence the market, either increasing or decreasing volatility. It can occur at the level of the global economy, a local market, or even a single trading instrument. Here is a list of factors that affect volatility:- Central bank decisions
- Changes in interest rates
- Key political events
- Geopolitical factors
- Extreme weather conditions and natural disasters
- Announcements or speeches by politicians
- Changes in the tax policies of major countries
- Large acquisitions or company mergers
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