Successful day trading necessitates the ability to recognize and act on trends and patterns rapidly. It’s difficult to know which stocks to keep an eye on, but once you’ve mastered the skill, you’ll be well ahead of the game.
What is Market Volatility?
Over the previous few decades, stocks and indices have produced stable returns, but day-to-day trading has been everything but consistent. Markets react to a variety of causes, and prices can swing dramatically in the short term.
Volatility is defined as the difference between the range of returns during a given time period and the average return. Volatility is a measure of the unpredictability of stock returns that ignores trends and direction.
Volatility metrics aren’t concerned with whether a stock is up or down; rather, they are concerned with the price variance in reference to the mean.
Amazon stock, for example, increased by 21% in 2019, but prices did not rise in a straight line. By July, the stock had risen 30%, but subsequently plummeted 20% and remained in a narrow range until November.
As the holidays approached, the stock broke out of its trading range and completed the year up 21%. Long-term stockholders were pleased with the annual return, but day traders who kept the stock until summer and then sold it short until Thanksgiving saw significantly larger gains.
When opposed to equities that are entrenched in a trend, volatile stocks are the day trader’s bread and butter since they offer so many opportunities to profit.
5 Ways Traders Can Take Advantage of Market Volatility While Day Trading
1. Setting Up a Watch List
You should definitely keep a “watch list”. This is a sample of the stocks you should keep an eye on. Many stocks have identifiable patterns, and many traders can make reasonable bets about whether the stock is poised to move up or down with a little expertise studying the same group of stocks. The majority of effective day traders execute trades from their watch list.
When it comes to selecting stocks for your watch list, there are various factors to consider!
Liquidity is probably the most essential factor. I always look for equities with a daily volume of at least 250K shares. If the stock isn’t performing well, you can have problems selling when it’s time to exit. You’re not going to make any money if you can’t sell the shares. I prefer to trade equities that trade above 1 million shares per day, but never less than 250,000. When a stock is thinly traded, market makers have an easier time manipulating the price.
You should also consider volatility. The rate at which the price of a securities rises or falls is known as volatility. A $20 stock that moves $5 up or down in a day is considered very volatile.
Large price swings are where savvy day traders profit while others lose money. This, in my opinion, is one of the most crucial requirements. Good stocks are volatile, at least in terms of day trading. When the price fluctuates drastically over a day or a few days, day traders profit.
Stocks with a high dividend yield should be avoided. We’re not investing for the long haul, so the dividend isn’t important, and these stocks have high prices and minimal volatility. There’s nothing wrong with dividend-paying stocks, but they should be used as part of a long-term investing strategy rather than a trading medium.
Big board stocks might have a lot of volatility and big price movements. Nothing, however, has the volatility (and risk) of pinksheet stocks or “penny stocks” when measured by percentage. These low-cost stocks trade for less than a $1 and can have a lot of volume. Some equities can move by 100 percent to 200 percent or more in a single day. Clearly, there is a great deal of risk involved. However, you may get started with just a few hundred bucks. You can actually make money if you decide well. I know folks who make their living solely by trading penny stocks.
Make a list of 30 to 50 stocks and indices trade and learn everything there is to know about them. What influences their movement in the market? What news stories cause them to rise or fall? This is your stock farm, so take good care of it. You’ll be able to trade like a pro once you understand what moves your stocks.
2. Concentrate on Stocks that are Currently Trending
Despite the increased overall market volatility, there may still be equities that show good trending activity—albeit at a higher risk. The key to this strategy for a buyer is to discover a stock that has been heading higher but hasn’t increased its ascent.
In a volatile market, a short seller should hunt for a stock that has been decreasing but hasn’t yet had a collapse or “waterfall” decline. The idea is to enter before a price acceleration (or, in the case of a short seller, a price collapse), not after.
3. Keep an Eye Out for Consolidation Breakouts
“Buying the breakout” is a common trading strategy adopted by certain traders. A trader uses this method to keep an eye on a stock that is moving within a defined support and resistance range.
The trader does nothing as long as the stock stays inside that range. If the price breaks out to the upside, the trader will attempt to buy the stock right away, hoping that the breakout would herald the start of a new up-leg for the stock.
4. Draft Up Short-Term Strategies
When markets are volatile, some traders opt for a shorter-term trading strategy. This usually entails attempting to profit—or at the very least lock in profits—as early as possible.
Consider a trader who typically buys equities when they break out above resistance. After entering a trade, this trader typically places a stop-loss X percent below the entry price and then waits for a profit of at least Y percent to accumulate before activating a trailing stop, which is a conditional order that uses a trailing amount rather than a specific stop price to determine when to submit a market order.
The trailing amount, which can be expressed in points or percentages, follows (or “tails”) the price of a stock as it moves up (for buy orders) or down (for sell orders) (for buy orders). The trailing stop will climb in tandem with the stock price, allowing the trader to potentially sell at a higher price.
However, in more unpredictable markets, when profits might vanish and losses can quickly mount, you may want to consider making the following adjustments to exit the trade more quickly:
5. Set a Profit Target of a Certain Percentage.
If the market rises swiftly, consider selling some of your stake and holding the rest in the hopes of making more money. Use a tighter-than-normal trailing stop price and/or enter a trailing stop order sooner than usual.
Tips For Day Trading in Periods of Volatility
Traders seek price movement because it provides them with the potential for greater earnings. However, price fluctuation can sometimes be faster than they’re used to.
Stocks can fluctuate so quickly in tumultuous markets that paying closer attention and changing techniques may be required. The secret is to plan ahead of time.
The procedures outlined in this article aren’t a guarantee that you’ll stay on track, but they’re worth considering if you’re prepared to deal with fluctuating markets.
Wait It Out If You’re In Doubt
Sitting on the sidelines isn’t a bad option if you’re not sure where the markets are going. Volatility spikes come and go, and they’re usually short-lived, so, occasionally, the smartest trade you can make is not trading at all.