Minimizing Downside in a Volatile MarketBy: Zoe Harris, Trader Posted:
The common theme linked to volatility is variation and unpredictability. The definition of volatility is the liability to change rapidly and unpredictably, especially for the worse.
The question is: Are you a Trader or a Long-term Investor? This question helps you to shape your strategy to deal with volatility in financial markets.
Typically, traders will embrace some degree of volatility as volatility sometimes provides opportunity.
A series of entry and exit points are created which may enable a trader to yield much higher returns in comparison to the conventional investor. What traders aim to do in volatile markets is find strategies to limit their uncertainty, limit their downside risk and use trading interfaces that offer the most agility.
Technical analysis takes centre stage on the trading floor in periods of high volatility as well as indicators to identify momentum and pinpointing correlations. Mapping short term trade ranges is also important. Relative strength indicators can highlight overbought or oversold assets over a defined time period.
Traders also use indexes and market gauges to measure volatility; one of these is the VVIX which measures market volatility in stocks over time.
We spoke about traders and volatility, now the more long-term focused investor can also benefit from volatility as present positions may be oversold and in this case, it presents an opportunity to pick up quality assets at lower prices and take advantage of under-priced Blue Chip equities.
Investors must identify more defensive industries or companies with strong balance sheets that are likely to weather or fair better in an economic downtown and also consider those that would be able to bounce back fairly quickly. Be mindful that there will be fluctuations in investment value.
It is also important to hold near cash assets that offer a level of principal protection while maintaining liquidity to take advantage of opportunities as they arise. What is paramount is having a well-diversified portfolio to balance between risk and return. In essence, over longer periods the effects of high or low volatility are typically muted.