The US Stock market is just finishing its most volatile week ever. Automated trading programs seem to be driving stocks up and down in large steps. This is dangerous territory for investors and an ideal opportunity for short term day traders. Trading volatile stocks with technical analysis may result in significant profits during such times.
What Is Volatility?
According to Investopedia, volatility is the range of prices for a given stock or index.
It is quantified by short-term traders as the average difference between a stock’s daily high and daily low, divided by the stock price. A stock that moves $5 per day with a $50 share price is more volatile than a stock that moves $5 per day with a $150 share price, because the percentage move is greater with the first. Trading the most volatile stocks is an efficient way to trade, because theoretically these stocks offer the most profit potential.
The key to trading volatile stocks with technical analysis and making money is finding the stocks to trade and correctly using technical indicators to trade them. One only needs to run a stock screen for volatility and volume to find stocks to trade.
What is Technical Analysis?
Technical analysis is the reading of price patterns in order to predict the next market movement. These price patterns have statistical significance and are based on many previous market situations.
Volatile stocks are prone to sharp moves, which require patience in awaiting entries but quick action when those entries appear. As with any stock, trading volatile stocks that are trending provides a directional bias, giving the trader an advantage. Certain indicators can be used to trade volatile stocks, but the trader must also monitor price action – watching if the price is making higher swing highs or lower swing lows relative to prior waves – to determine when indicator signals are taken and when they are left alone.
There are many technical indicators but knowing how to use one or two to their best advantage is a better approach than trying to use too many and becoming confused by their predictions.
Trading Volatile Stocks with Technical Analysis in Today’s Market
The eventual price of a stock is determined by its earnings and prospects of future earnings. But, the short term price of the stock is based on the market’s opinion of how likely earnings are to rise or fall. Over the last few years the big tech stocks have led the market and always were the most likely to take a hit when the market corrected. A smart technical trader will keep this in mind when trading the ups and downs of the current market. Business Insider looks at how tech stocks got mauled and which ones are likely to be hurt worse.
The losses were widespread, and even the FAANG basket – Facebook,Apple, Amazon, Netflix, and Google parent Alphabet – wasn’t spared. Apple (-12%) and Google (-5%) are down for the year, and Facebook (-27%) has fallen off a cliff. Meanwhile, Amazon (+18%) and Netflix (+21%) are still higher, but they’re well off their highs.
And while FAANG stocks have been hit hard, there are other names that have fared far worse. Two types of companies – Chinese tech and semiconductors – were among the hardest hit, as uncertainty around the US-China trade war and slowing global growth weighed on investor sentiment.
Here is where knowledge of stock fundamentals is important. The day to day and even minute to minute market fluctuations are driven by technical traders and by the greed or fear of individual investors. But, eventually a stock will end with a price consistent with its fundamentals. A technical trader trading volatile stocks with technical analysis will do well to keep this fact in mind.
