Profiting From High Volatility
Jan 25, 2010 Financial Investment
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.
The first thing investors need to do when it comes to taking a run at profit is to distance themselves emotionally from their investments. Trading software that provides signals on when to buy and sell can help in this regard, but this is something most individual investors are unable to accomplish. Think about it: we all work hard for our money and we hate to see it wasted. This is a benefit that money managers have — they haven’t worked hard for the money you invest, so if they lose, they lose your money, not theirs.
The second thing the investor needs to do is understand volatility. This can be done primarily by studying graphs on sites like Yahoo! Finance (type “^VIX” in the quote section) but also by realizing and appreciating the dictionary definition. Volatility is the rate of change in a price’s deviation from its mean. This means that the higher the volatility, the more quickly a price will deviate from it’s mean price.
Lastly, investors need is to hold back from being consumed by greed. This poses an immense challenge for most people as short-term gains often hint at larger longer-term returns. Trading system can help in this regard as well since they so effectively strip the emotion factor from any trade by focusing solely on statistical figures like volatility, momentum, relative strength and so on. Individual investors, on the other hand, focus on the potential of profit or loss.
While trading systems allow investors to remove the emotional side of investing, they are not absolutely required provided that the investors can control their greed. By eliminating emotion, investors can take advantage of the profit opportunities that volatility offers.
Chris has more than 16 years of financial services experience. As the Fund Adviser for the MutualFundSite.org, he recommends Balanced Funds as a starting point for people who want to know Where To Invest 10,000.
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