Volatility refers to a period when the price of an asset is moving up and down significantly in a short period. This asset could be stocks, cryptocurrencies, currencies, and commodities.
A good example of a volatile stock is GameStop. In February 2021, the company’s share price rose from below $20 and soared to $484 within a few days. It then dropped and reached $37 and then bounced back.
Some assets are rarely volatile. For example, the USD/HKD pair has spent at 7.7500 for the past few months because the Hong Kong dollar is usually pegged to the dollar. This makes it difficult to trade.
Why there are Periods of Low Volatility
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.
Short-term traders, however, 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.
Ho to Measure movements: the VIX index
Investors measure volatility using the VIX index. A low Vix number implies a period with a few amount of 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, Wall Street Bets, Iranian Nuclear Deal, Trump’s trade wars, and the performance of Treasury yields.
» How to Trade in Periods of High Volatility
Recent period of low volatility
A few years ago, the world witnessed a prolonged period of low volatility, as shown in the chart below. In fact, in 2017, the CBOE Volatility Index (VIX) dropped to the lowest level on record.
This means that traders struggled to make money. A report 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, or a 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?
Find sectors or instruments that have some degree of volatility
One way of making money in periods of low volatility is to find sectors and instruments that have some volatility. The idea is that in most periods of these periods, many assets tends to have their own volatility.
For example, in stocks, some companies will announce weak earnings while others will announce significant management changes. This will lead to volatility in their stocks.
There are several ways of achieving success in such a period.
Watch for premarket movers
First, every morning, use platforms like Investing.com and Market Chameleon to find companies that are moving in the premarket.
Find important info
Second, try and find the reasons for this price action. A simple Google search can help you get this information. Alternatively, you can get this information from subscribing to a market watchlist.
Do your analysis
Finally, use this information to trade these assets. To do this, combine the fundamental strategies like using the level 2 and time and sales, with technical analysis strategies to trade the assets.
Further, if the low volatility is happening in the stock market, you should try and find other areas showing high volatility. Some of these markets could be the cryptocurrencies, commodities, and currencies market.
It is common to identify potential opportunities across other markets.
The United States and Canadian markets might not be volatile but that does not mean the same is happening in other countries. 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.
For example, if the US equities are less volatile, you can look at other countries like the emerging markets.
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.
External Useful Resources
- Further useful information can be found on Forbes.