The prices of instruments are always fluctuating in the stock markets. This is not a bad thing. You would not be able to make any money as a trader or an investor in the financial markets if the prices remained the same. There are times when the prices of instruments move in a much swifter manner than at the other times. The margin of the modifications or changes in the prices of the instruments is known as turbulence or volatility. As these fluctuations grow, the chances of making more profits rapidly also increase. But the issue is that such fluctuations also mean that there will be more risk. The volatile markets can be used to get above the average profits. But the investor or the trader also has the risk of losing a big amount of their capital in a short period. You may have a lot of discipline. Then you will be able to take significant benefits of such turbulent markets while lowering the chances of risk. This article will give you some tips to cope with turbulent and volatile markets.
Brad Lineberger, CFP, president and founder of Seaside Wealth Management, said, “The higher the standard deviation, the more that portfolio is going to move around, up or down from the average. About one in five years, you should expect the market to go down about 30%. If you can’t handle that type of volatility, you really shouldn’t be an equity investor because that’s about average. This is how it works. And if you can stomach it, you can enjoy outperforming inflation by almost three times per year. My best advice is to embrace volatility and know that it’s normal. Companies are very resilient; they do an amazing job working through whatever situation may arise. While it’s tempting to give in to that fear, I would encourage people to stay calm. With history as our guide, those who are patient and disciplined have done very well.”
Volatility shows the movements of prices in the financial markets over a period. It is the standard deviation of the annualized returns of an instrument over some time in the financial markets. It is basically the rate at which the cost decreases or increases. If the cost moves around a lot in a short period, getting new lows and highs, it is said to have a lot of volatility in turbulent markets. If the cost moves around more slowly or stays sideways, it is said to have low volatility. The volatility of the past is found using a series of the market prices of a specified time frame. The implied volatility takes a look at the forecasted future volatility. It uses the prices in the financial market of a derivative that is traded in the market, such as an option. The volatility is a normal part of investing for the long term in the financial markets.
There are a lot of factors that can cause turbulent markets and can lead to a lot of fluctuations. This includes changes in policies of the administration or business changes. It can also be caused by corporate actions or the state of the national or global economy. This might seem unusual for the new traders or investors. But it is considered the usual course of business for the financial markets. When traders are ready at the start for such periods of turbulent markets on their journey of investing, they are not going to be very surprised when it happens. They are more likely to react in a logical and rational manner. By knowing that fluctuations are part and parcel of investing in the financial markets, the investors can prepare themselves mentally and stay focused on the long-term goals of investments.
Before trying to make any investments in the turbulent markets, ensure that you are tactically and mentally ready to manage the risks involved. This means that you know that there is a great chance that you might lose your capital. Also, you are ready to trade when the fluctuations are high, and the markets are in choppy waters. If you are ready for this, the best thing to do is to ensure that all the measures to restrict risk are included in your plan of trading. Some vital considerations are stop order placement and the size of the position. Stop orders can also assist in restricting probable losses or safeguard profits on a position by permitting you to set price triggers that will automatically square off your positions. During turbulent markets, there are several traders that will place small trades. This means that they will not put up a lot of capital per trade. They will also set their stop prices a lot further from the current market price than what would be required when the markets are stable.
The aim is to keep the overall exposure risk nearly the same. It will decrease the probability that the investor will be stopped out of the trade because of more than usual fluctuations in the intraday prices. It would be best if you also kept in mind that the stop orders can be executed a significant distance away from the stop price when there is a large gap in the prices or when the conditions in the financial markets are changing quickly. Gage Paul, CFP, a financial advisor, said volatility is the price you pay when investing in assets that give you the best chance of reaching long-term goals. It is expected and could be viewed as a cost in meeting these goals.” Benjamin Offit, CFP, said, “When the market is down, pull money from those and wait for the market to rebound before withdrawing from your portfolio.”
The volatility in the financial markets does not erase the trends that are presently there. There are some shares that may continue to make some movements in a certain direction. But they will have a higher chance of risk. For any purchaser in the financial markets, the main thing is getting a share that has been trending higher at a steady speed but has not seen upward growth. The aim is to get into the trade before a sudden acceleration in the prices of the shares, not after. Similarly, any short-seller trading in a turbulent market should seek out a share that has been decreasing but has not yet seen a sudden collapse.
Gopoian Wirick, CFP, founder of Prosperity Wealth Strategies, said, “Market volatility is a normal part of investing and expected in a portfolio. If markets went straight up, investing would be easy, and we’d all be rich. We set aside an appropriate emergency fund, so clients do not have to worry about selling down investments to fund cash needs during periods of market volatility. This creates peace of mind for clients.” Freddy Garcia, a CFP, said, “Most likely this was due to the long-term bull market over the past decade, which has created complacency among market participants. When markets get spooked, VIX temporarily prints in the 40s or 50s as traders rush to purchase protection for portfolios. Particularly in stocks that have been strong over the past few years, periods of volatility give us a chance to purchase these stocks at discounted prices.”
Investors and traders look for movements in prices because of the high chances of making huge gains. But there is always a chance that the prices will make a swift movement than they usually do. In such turbulent markets, it is good to pay more heed than usual and modify the strategies accordingly. But the traders and investors should not try to implement new things without practice. You must prepare well in advance for all scenarios. You may not be sure where the markets are going to go. Then you can just sit on the sidelines and wait until the turbulent markets calm down. Such spans of increased fluctuations come and go in the financial markets and do not stay for long. There are times when the best option is not to make any trade at all.