When volatility is high, the dispersion will be wider as well as the price range. These premises carry the basic principle of investing. The higher the risk, the higher the potential returns. Do remember, standard deviation could go both ways, in both a positive and negative light.
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When a highly volatile stock is spread out over a wide range of values, the price of the security can significantly increase or decrease at any given moment. Beta is a direct measure of a securities volatility when put up against a particular benchmark. Beta chart. Image: CorporateFinanceInstiute.
For example, when a stock has a beta value of 1. A low beta indicates lower volatility, lower risk, but the lower potential for high returns. The reasons why traders are continuously looking for the most volatile stocks are clear. Simply, there are greater chances for significantly higher returns.
Investors who trade in volatile stocks have a greater opportunity to make bigger profits than those who play it safe and stick to low-volatile stocks. You have to be in the game to win big. Rather, volatile stocks can make an attractive difference when it comes to net profit too.
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The best way to do this is to take the risk against volatile stocks. The difference between big wins and chump change is to take this gamble even if profits are not guaranteed. In a nutshell, without volatility, there is no scope for trading. Price fluctuations are a necessary characteristic of the stock market in order to make any profits at all.
Using volatility as a key determinant of stocks selections is both challenging and rewarding. High upswings will often equate to high profits.
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Do keep in mind the magnitude of loss as well. If you are tempted by the great possibility of gain, you should also be reminded of the great possibility of loss. Simply be strategic about your approach to volatile stocks. At this point in your consideration, do bear in mind your individual circumstances as to how much capital you can afford to invest and potentially lose. Volatile stocks are characteristic of and prone to sharp movements, which require patience to wait for entries but immediate and quick actions when they appear.
As with all stock trading, volatile stocks that are trending can provide a directional bias — giving the trader an advantage. There are a few indicators that can be used to trade volatile stocks, of the most permanent, monitoring price action is key. That is, watching to see whether the price is making higher swing highs or lower swing lows relative to previous waves. This should be done to determine when indicator signals are taken and when they are left alone.
The two technical indicators to use when trading volatile stocks, include Keltner Channels and Stochastic oscillators. Keltner channels effectively put an upper, middle and lower band around the price action on a stock chart. This indicator is most useful in strongly trending markets. That is when the price is making higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend.
In a strong uptrend, the price will ride the upper Keltner channel and pullbacks will barely reach the middle band and not exceed the lower band. The middle band is the entry point, and a stop is placed between the mid-band and lower band, while an exit is placed just above the upper band.
The same concept is applied to downtrends. Keltner channels are created using the previous 20 price bars, with an Average True Range Multiplier to 2.
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The reward, relative to risk, is typically between 1. Keltner Channel. Image: Commodity. Interpretation of the Keltner Channel can be made simple when looking at the possible buy signal and the possible sell signal. The former occurs when the price closes above the upper band — buy. The possible sell signal is when the price closes below the lower band.
The Stochastic Oscillator is another indicator to use when trading volatile stocks. Volatile stocks will typically settle into a range before trending in any direction.
The next move could create a largely negative position, traders will need some confirmation of a reversal. The stochastic oscillator measures the momentum of price movements — that is the rate at which the price accelerates or decelerates. So, this tool can be used to predict trend reversals. By reflecting on the closing price to previous movements in price, the indicator seeks to predict price reversals.
The two-line indicator can be applied to any chart and fluctuated between 0 and It illustrates how the current price compares to the highest and lowest price levels over time.
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Stochastic fast and slow. It uncovers overbought and oversold conditions Above 80 is typically considered overbought and below 20 is oversold. Trading the most volatile stocks possible is an efficient way to trade. This is because, in theory, these types of stocks offer the most profit potential. So, many traders seek out the utmost volatile, but they come to face one serious question when doing so: where to find them? Some of the most volatile stocks are currently in the energy and medical industries.
Rather, the simplest way to look is to run a stock screen for stocks that are consistently volatile. When doing so, remember that volume is key when trading volatile stocks. The more you find, the easier it will be to enter and exit.
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Stock Fetcher is a great tool that filters stocks and enables users to track the most volatile ones. Those looking for a more research-led approach to find volatile stocks, one option is to look for them manually. Finviz is a free tool that lists the top gainers, top losers and the most volatile stocks for each day. Its screener tool can help to filter results for market capitalisation, performance and volume. Screening tool with filters. However, these are not filtered results and will only reflect volatility for that day. So, the lists will only include potential stocks that will continue to be volatile.
In short, volatility moves towards the average. Stock prices will constantly work towards being in equilibrium. After volatile periods there will be consolidation which is the time traders use to evaluate their positions and positions along with the main trend. As well as swinging high in price, highly volatile stocks are typically issued by small and mid-cap companies. They can often be issued by startups showing tremendous potential for growth.
Such companies usually offer goods and services of high demand in the market. A few months from now, a couple of these stocks may have demonstrated enough momentum to be worth the short-term investment. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports. Cancel Reply. You must be logged in to post a comment.
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