June 9, 2009
It Is Not Too Late To Profit From High Volatility
For anyone who has been invested in the markets over the past two years, it should come as no surprise to discover that market volatility, as measured by the Chicago Board Options Exchange, has risen from the range 16 to nearly 80, the highest level ever recorded.
To give perspective to just how high the volatility index climbed, think back to the chaos that followed September 11, 2001. That point, volatility “spiked” to 33. These days, as the index reports a number in the 30 range, the markets seems subdued. This is definitely not the case, which means investors can continue to profit from volatility.
When taking a run at profiting from the markets, individual investors will only succeed when they are able to distance themselves from the emotion of investing. This is extremely difficult to do, however, and is why so many investors are gun shy and keeping their money invested in safer instruments. It’s not difficult to understand; we all work hard for our money and to see it erode in a market where we receive no tangible benefits is terribly difficult. Trading software that tells us when to buy and sell can eliminate this emotion as the software, like an investment manager, does not care that we invested blood and tears into our investments.
Secondly, the investor should have a good understanding of volatility. Reviewing the charts at Yahoo! Finance by typing “^VIX” in the quote box is a good start. Another essential is to understand the definition of volatility, which is simply “rate of change of the deviation from the mean.” The higher the volatility, the more quickly will stray from its mean.
The last thing an investor needs to do is tame the beast known as greed. This is a difficult thing to do since short term returns give us a taste of just how much we might make if we stay invested just a little longer for just a little more money. By using trading software, investors are better able to remove the emotion since the software will study concrete factors like volatility, moving averages, momentum, and so on whereas investors study the profit and potential for more.
To summarize, taking emotion out of the investment equation and relying on technical measurements that give strong probabilities as to the direction of a stock, traders can use volatility to profit. Used properly, a trading system can assist with the emotional side of a trade and can provide strong signals for entry and exit points.
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