Very often, when choosing a strategy, we have to pay attention to such an indicator as the volatility of an asset or the overall volatility of a portfolio.
Volatility is the range within which the price fluctuates in the short term.
For example, in February — March 2020, the S&P 500 price fluctuations reached up to 10% per day. From February 20 to March 23, 2020, the index fell by 34%. During the same period, the Russian RTS index lost more than 40%. That’s just such price movements can be called volatility.
In general, excessive volatility is not a very good indicator for an investor. But if you know how to use it, then you can also earn extra money on it.
How is volatility determined?
To assess the degree of risk and determine the optimal entry points to the market, the following volatility indicators are most often used:
1) ATR. This indicator has become the most widespread. It reflects the current extreme values of the asset value.
2) CCI. An indicator that helps to determine the best moments for entering and exiting the market by tracking the indicators of Japanese candlesticks.
3) VIX shows the expected 30-day volatility of the S&P500 index, and RVI shows the expected 30-day volatility of the RTS index. It is important for investors to remember that volatility indices are calculated based on forecasts, and not on real data.
With the disadvantages of volatility, it is more or less clear that no one likes it when their portfolio falls by 5-10% per day.
Advantages of excessive volatility
1) Volatility allows investors to buy assets on drawdowns. But to do this, you must clearly understand that the asset is fundamentally strong.
2) During volatile markets, investors and traders can make quick profits. Of course, these are all speculative stories and they should be treated very carefully.
3) With the help of futures on the volatility index, experienced traders and investors can hedge risks.
For long-term investors, volatility is an additional opportunity to get a higher percentage of profitability.
But for beginners-be very careful in volatile markets. Don’t let your emotions prevail over your decisions
Check out the interesting graph below. How emotions affect moods.,
Always analyze the securities and buy and sell only in accordance with your strategy.
Don’t you have a strategy yet?