How to Manage Trades in a Volatile Market?: Volatility is the statistical tendency of the market to rise or fall within a certain period of time.

Volatility in the market is measured by the standard deviation.

It can be measured by how much the price deviates from what is expected, generally, it’s mean.

What do volatile market periods look like?

  • When the volatility increases, we will see wide ranges in prices, high volumes, and more trading in one direction.
  • The best example here is that we will see a few buy orders when the market is tanking and a few sell orders when the market is ramping.
  • During this time, traders will be very reluctant to hold their investments or positions because they realize that the prices might change dramatically, which might turn the winners into losers.
  • There is always a high probability of a falling market when the volatility is high, and there is very low volatility in rising markets.

Participants in the market:

There are 3 types of participants in the market and they are as follows:

3 types of participants in the market

1. Intraday traders:

  • Here, the good part is that, as the volatility increases, the potential to make more money will also increase.
  • However, the bad news is that higher volatility will mean higher risk.
  • When the volatility spikes up, it may be possible to generate an above-average profit, but here you will also run the risk of losing a large amount of capital in a very short period of time.

2. Swing traders:

  • When the market becomes volatile, we have to be prepared for any sudden good or bad news after the market hours.
  • If there is any major news after the market hours, then we might expect a big gap up or gap down opening on the next day.

3. Investors:

  • The main aim of the investor is to find a quality business that will also grow and perform well in the future.
  • This should create wealth for us as well.

Don’t Forget to Check: Best EMA Strategy for Intraday Trading

Strategies to manage trades in the volatile market:

The following are the strategies to manage the trades in this volatile market:

the strategies to manage the trades in this volatile market

#1. In a long-term bull market, cash is king in volatile times:

  • If the Indian market is in the midst of a prolonged uptrend, then the volatility should be used as an opportunity to add to your positions in quality stocks.
  • One of the toughest challenges in a sudden market change is not having enough liquidity at your disposal.
  • This can be used to capitalize on the opportunities that this market will give you.
  • Here, you will have to ensure that you have got enough cash or at least are able to liquidate at very short notice to make the best of the lower prices.
  • This is because when the tide comes, it will take the good stocks down along with the bad ones.

#2. There is no point in trying to time the market, but do use benchmarks:

  • It is very well said that: “Time always works better than timing in the equity market.”
  • Remember, if you are invested in quality stocks, then you are bound to earn superior returns over a longer period of time.
  • But then the question will arise: how will you generate alpha?
  • It is where the volatility will give you an opportunity.
  • It is almost impossible in reality to buy a stock at the bottom and then sell it out at the top.
  • The best thing you can do here is to set a benchmark.

#3. Keep investing regularly; that is safer and simpler:

  • If you do not want to get into the drama of high and low P/E ratios, then the best way out for you is to focus on regular as well as periodic investing.
  • The moral of the story here is to have a phased approach that will work best in a volatile scenario.

#4. If you are a trader, then stick to your trading plan and your risk tolerance:

  • The most important rule for a trader in a volatile market is to stick to the trading plan.
  • Volatile markets are the ones that take less risk, not more.
  • Always remember, the chance of hitting a stop loss in a volatile market is higher and hence you need to trade with a very strict stop loss and a lower risk tolerance as well.
  • But, in volatile markets, you will have to rely more on limit orders than market orders.

#5. Preserving your capital is the top priority:

  • If you are a trader, then you will have to ensure that you do not wipe off your capital.
  • When you are in the middle of a long-term uptrend, volatility won’t last for long in the market.
  • But if you end up losing a lot of capital, then that will restrict your trading capacity once the market returns to normalcy.
  • During volatile markets, you can make a lot of money by staying out of the market rather than trying to play the market.

#6. Profit is what is booked; all else is booked profit:

  • This is very true for all traders in all kinds of markets.
  • In a volatile market, take your profits at regular intervals.
  • Volatile markets tend to run a very high level of overnight risk, and any sort of overnight risk will wipe off the profits in no time.
  • The more profits you take off the table, the more liquidity you will have to churn out.

Also Like: How to Find the Best Intraday Stocks?

Conclusion:

We hope that the above blog gives you clarity on how to manage trades in volatile markets.

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Frequently Asked Questions (FAQs)

Answer: Yes, volatility provides opportunities for all-day traders.
Answer: The best volatility indicators are the Cboe Volatility Index (VIX), average true range (ATR), and Bollinger Bands.
Answer: The 5 stocks that are highly volatile are Sun Pharma, Suzlon Energy Limited, Garden Silk Mills, Jubilant Industries, and KM Sugar Mills.
Answer: Volatility averages around 15% and is often within a range of 10-20%.
Answer: By focusing on your goals, you can stay calm in a volatile market.
Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.