It’s been a wild ride for investors over the last 2 months as the markets have gyrated on a regular basis. In fact, the widely watched VIX – better known as the Volatility Index – has just posted its biggest quarterly rise since the 3rd quarter of 2011. During that time, there was a downgrade of U.S. credit as well as worries about Europe’s debt-crisis jitters.
And while there are many possible reasons for this increase in volatility today, many professional traders think it’s here to stay – for a while anyway. For those not familiar, the VIX reflects option traders’ collective expectation for S&P 500 volatility in the coming 30-day period. A general rule of thumb is that a reading above 20 implies an expectation of increased volatility over the next month and as of the close yesterday, we’re right at that level.
As the intra-day swings in the markets have increased so has the risk and not everyone is going to have an appetite for this risk. However, for those that recognize the risk and put systems in place to mitigate their risk, these volatile times can be advantageous to trade.
That said, while you can generate above average profits within a short period of time if you’re on the right side of a trade, it’s important to understand that you also stand to generate above average losses if things go the other way.
Below are three keys to keep in mind as you consider taking advantage of these volatile markets. In addition, there is a link to a video below that will discuss each one further.
- Understand your style of investing to decide your strategy.
- Make sure you understand the potential benefits as well as the risks.
- Develop a clear strategy that will increase your potential while limiting your losses.
Each of us has a style of investing ranging from intra-day traders to longer term investors and those in-between. For the most part, investors are advised to stay with their adopted style of investing regardless of market conditions as straying outside can lead to mistakes particularly if you are outside of your comfort zone or expertise.
To begin, utilizing a shorter-term trading strategy will benefit you in times of volatility as you are better able to take advantage of intra-day swings which in the last week alone were in the 2.5% range for half the time. To do this, you’ll need to have a clear-cut system in place which we will review in the video below.
For those with a longer-term investment horizon, while the recent volatility may be hard to stomach, selling all your holdings is never a good idea. Given that we are in a corrective mode at this time, most of those quality stocks you own should come back into favor once the markets resume their uptrend.
Instead, select profit taking would be better particularly if your stock has broken below its key support such as its 50 or 200 day moving average. Should these stocks come back into favor, you should have ample time to re-enter them if you desire.
One last point before sharing my video below. That is, when reviewing the risks and rewards of becoming active in this market, it’s important to have systems in place particularly to mitigate losses.
My video which you can access here, will discuss ways that you can put these systems in place. You’ll also be provided with more information regarding the current volatility in the markets as well as a step by step guide for how to create a trading plan to help increase your odds.
Mary Ellen McGonagle
President, MEM Investment Research
p.s. For those who would like a free, no obligation 2-week trial to my bi-weekly MEM Edge Report where we review the current markets and provide investment strategies, you can send me an email using this link.