Strategies to Make You Money in Periods of Low Volatility – Introduction

Long-term investors like Warren Buffet buy companies and hold them for many years. For example, Buffet has held Coca-Cola’s stock for decades. By doing this, he has made money as the stock has continually moved up during this time. For short-term traders however, they buy and sell stocks within a short period of time. They benefit from the huge moves that happen during the day. To make more money therefore, they require volatility which makes stocks and other instruments have huge moves. Investors measure volatility using the VIX index. A low Vix number implies a period of low volatility while a big number indicates a period of high volatility.

There are many factors that contribute to volatility. For example, an election in a major country or a referendum can contribute to volatility. Equally, other factors like trade deals or a major announcement from a major country can lead to volatility. Recent events that have contributed to volatility includes the just concluded American election, the Greek debt crisis, and the Brexit vote.

This year however, traders are facing a challenge of lack of volatility in the market. As shown below, the volatility index has remained extremely low this year.



This means that traders have had a challenge of making money. A report last week from Bloomberg quoted several traders who were idle most times of the day because of this problem. It is therefore understandable that quant traders like Renaissance Technologies have reported sluggish performance this year. Market Making companies like Virtu Finance which benefit from volatility have reported weak earnings and resulted to other strategies like M&A to survive.

The lack of volatility has been caused by several factors such as the lack of major global events. It has also been caused by the shift from active management to passive management. In the latter method, investors park their funds in passive funds like mutual funds and ETFs. How then do you make money during this time?

The first method is to find sectors or instruments that have some degree of volatility. Although most sectors have experienced a period of low volatility, some individual instruments have had an interesting performance. For example, in the cryptocurrencies scene, the main currencies have had an interesting run. This year, the main currencies like Bitcoin and Ethereum have quadrupled. However, in the past one month, they have fallen by more than 60%. This fall is credited to several factors. First, the acceptance of these currencies in major retailers and online shops has declined significantly. Second, there has been panic selling among traders when the prices started to fall. Third, this could be a correction. For traders, you can take advantage of the volatility to make money.

The second way of making money during such periods is to look globally. The United States and Canadian markets might not be volatile but that does not mean the same is happening in other countries. Day Trade the World (DTTW) gives you an opportunity to trade stocks from tens of countries. While a lot of caution is needed when trading stocks in these countries, it is possible to make money in their stock markets.

Third, you need to consider other asset classes or instruments. Perhaps you have made money trading stocks. In these periods, you can do well by experimenting with other assets like currencies or commodities.

The rule is to take more time to find areas that are still volatility. You should spend more time researching new areas like commodities and emerging market stocks to find areas to make money in.

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