When we say something is volatile we mean it is characterized by or subject to rapid, erratic, and unexpected change. In the stock market, individual stocks, as well as the market as a whole, may become volatile when prices move up and down quickly, confusing investors about the direction of a stock or the market in general. Volatility increases risk, increasing the opportunity to make or lose money quickly.
Before trading in a volatile market, consider your ability to follow through with your plans. Otherwise, you may not stick to your objectives while being whipsawed by the high volatility. This can cause you to buy near the top and sell near the bottom, which is not a good strategy for making money.
If you are an emotional investor, you may want to first get a taste of this wild action by investing small amounts of money. This may help you understand whether investing in high volatility stocks is your cup of tea.
Using stop-loss orders can help remove some of the emotional, flip-flop decision-making. Setting an automatically tripped buy or sell price that fits your preconceived plan can be good, but it might also cause you to sell on a downswing that turns around quickly causing you to sell at the bottom. If you had set the stop-loss a few pennies lower you would have watched the stock turn around and hit new highs.
Volatile markets may entice you to adopt short-term trading strategies over long-term buy-and-hold strategies. This way you can lock in profits on the upswing and be in cash on the drop.
Trailing stops can prevent you from being there when a momentum stock loses momentum. After all, most people can’t watch their stocks all the time. You can also set your stop orders to sell in increments. For example, if you have 100 shares, set a stop loss for 25 shares at the current price minus $1, set another 25 shares for a $1.50 loss, then sell the remaining 50 shares slightly above your original purchase price.
Likewise, you could set a series of selling prices while the stock is rising. This way you would lock in gains on the way up. You may not maximize your profit this way, but it is very disheartening to watch your stock rise slowly, then when you are not looking, drop quickly below your purchase price.
If volatile markets are not for you, the best strategy may be to wait until the market calms down. Great opportunities in the stock market pop up every day. It is better to buy when you are comfortable and ready. Tomorrow you may be happy with your decision to wait.