Educational Content

Pipscollector.com - Stock market volatility is an integral concept for traders to understand. Knowing the stocks with the highest potential for significant price movement, as well as how to trade them optimally, can mean exciting opportunities. 

In this piece, we explore high volatility stocks in more depth, look at how to identify the most volatile stocks, and provide best practice tips for trading them.

WHAT IS VOLATILITY IN STOCKS?

Stock market volatility refers to the range of price movement of a stock over time. A more volatile trade has the potential for significant gains, but also substantial losses. Volatility in stocks can be understood using the following measures:

1) Standard deviation

Standard deviation is the average amount the price of a stock has differed from the mean over a given period. Bollinger bands can be used by chartists to analyze standard deviation.

2) Beta

A stock’s Beta is a measure of its volatility in relation to the wider market. The market has a beta of 1.0, with more volatile stocks having a value greater than this (eg 2.0), and less risky stocks having a value closer to zero.

The chart below shows the price for the ATA Inc. stock (ATAI), listed among the most volatile by TradingView as of April 2019, with both the standard deviation and Beta measures of volatility included on the chart.

WHAT ARE THE MOST VOLATILE STOCKS?

When it comes to volatility and stocks, there is no one set of stocks that are always more volatile than another. Stocks can be classed as ‘currently volatile’, describing those stocks with current high swings, or ‘expected to be volatile’, meaning stocks that may be stable at this moment but have potential for high volatility in the future.

As can be seen in the above example, stocks can have periods of high volatility, for example showing a Beta near zero, then an increasing Beta to 2.0, and then falling back to near zero months later.

 

 

IDENTIFYING HIGH VOLATILITY STOCKS

When identifying high volatility stocks, traders can use a stock screener, search the derivatives market, and use third party websites.

Stock Screener/Filter

A stock screener or stock filter is an automated program that reveals a list of stocks that fit certain criteria.

For example, using a stock screener to monitor the stocks that had the biggest percentage gains or losses in a prior trading session, making sure each has enough volume per day, can be helpful to ascertain subsequent volatility. Helpful criteria to find volatile stocks may include ‘show stocks where the average day range (50) is above 4%’

Searching the derivatives market

Traders can use parameters in the corresponding derivatives market such as put call ratio, which is a tool to gauge market sentiment, open interest, the number of contracts outstanding on an exchange at any one time, and implied volatility, a market forecast of likely price movement. For these indicators, it is advisable to go to the official exchange website.

Third party websites

TradingView, for example, rounds up the most volatile stocks by percentage price changes.

HOW TO TRADE STOCK MARKET VOLATILITY

Trading stock market volatility successfully involves effective hedging, knowing when to sell stocks, employing sound risk management, and spotting buying opportunities when renowned stocks see a fall in price.

Hedging

Hedging against spikes in volatility is important to offset losses. This can be done by buying put options, which allow the sale of assets at an agreed price on or before a particular date, and trading inverse exchange-traded funds, which act as the inverse of the index or benchmark it tracks. Traders can also explore aggregated stocks through an index to protect against volatility (see below).

Selling stock/managing risk

If extreme volatility is affecting your mindset, it may be wise to sell off some stock and put your money into less dynamic securities. This leaves you free to trade another day without risking more than you are prepared to lose.

Practising sound risk management is essential when dealing with aggressive price action. Volatile stocks can lose you a lot of money and should not be traded if your mindset isn’t right that day, particularly if day trading.

Spotting buying opportunities

Sometimes a buying opportunity arises when high volatility hits the price of high-quality stocks. For example, in early 2019 the NASDAQ and S&P 500 constituent Apple cut its earnings forecast, leading to its price dropping 10-15% in the following days. However, just three months later, it completely recovered and approached a $1 trillion valuation once more. Identifying opportunities to go long when the market conditions reverse is one way traders look to speculate when coupled with prudent trade management techniques.

VOLATILE STOCKS FOR DAY TRADING

Like the most volatile currency pairs, volatile stocks can show significant movement throughout the day, making them potentially an attractive option for day traders. While some stocks may move 0.5% in a single day, others may move as far as 5% in the same period, meaning traders should be constantly alert.

To find a volatile stock for day trading, watch a stock you found with your stock screener for intraday movement. If a stock opens down 10% and starts moving, as opposed to staying static, it is being day traded and may be worth consideration.

Due to the speed of price movement, executing day trades can be a physical endeavour and good reflexes win the day.

 

 

VOLATILE STOCKS FOR SWING TRADING

Swing traders hold positions for more than a day, making the effects of volatility potentially smaller than when day trading. Stocks that may be suitable for swing trading include large cap stocks such as Apple, Facebook and Microsoft, because they have a large volume of shares changing hands at any given point.

SUMMARY TIPS ON TRADING STOCK MARKET VOLATILITY

When it comes to trading stock market volatility, the following tips are useful:

1. Be aware that price movement usually shares a strong correlation with the performance of the major stock indices on which the stock is traded.
2. In addition to macroeconomic themes, don’t forget that single stocks are beholden to microeconomic concerns like regulation, liability and performance of the management. To ward off unforeseeable risks, a trader can explore aggregated stocks through one of the major stock indices such as FTSE 100, DAX and CAC 40. Trading an index removes some of the smaller risks and while still granting exposure to the equity asset class.
3. Index trading is vulnerable to liquidity concerns in times of extreme volatility and crisis. To combat a potential lack of liquidity in a stock market, currency markets can offer a much deeper pool of participants and capital.

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WHY YOU SHOULD USE A TRADING CHECKLIST

Pipscollector.com - Implementing a trading checklist is a vital part of the trading process because it helps traders to stay disciplined, stick to the trading plan, and builds confidence. Maintaining a trading checklist presents traders with a list of questions that traders need to answer before executing trades.

It is important not to confuse a trading plan with the trading checklist. The trading plan deals with the big picture, for example, the market you are trading and the analytical approach you choose to follow. The trading checklist focuses on each individual trade and the conditions that must be met before the trade can be made.

YOUR TRADING CHECKLIST

Before entering a trade, ask yourself the following questions:

1. Is the market trending or ranging?
2. Is there a significant level of support or resistance nearby?
3. Is the trade confirmed by an indicator?
4. What is the risk to reward ratio?
5. How much capital am I risking?
6. Are there any significant economic releases that can impact the trade?
7. Am I following the trading plan?

1) IS THE MARKET TRENDING OR RANGING?

Trending markets

Experienced traders know that finding a strong trend and trading in the trend’s direction, has the potential to lead to higher probability trades.

There is a well-known saying that trending markets have the ability to bail traders out of bad entries. As can be seen below, even if a trader entered a short trade after the trend was well established, the trend would continue to provide more pips to the downside than to the upside.

Traders need to ask themselves if the market is exhibiting signs of a strong trend and whether ‘trend trading’ forms part of the trading plan.

 

Ranging markets

Ranging markets tend to see price bounce between support and resistance to trade within a channel. Certain markets, like the Asian trading session, tend to trade in ranges. Oscillating indicators (RSI, CCI and Stochastic) can be of great use to traders that focus on range trading.

2) IS THERE A SIGNIFICANT LEVEL OF SUPPORT OR RESISTANCE NEARBY?

Price action tends to respect certain price levels for a number of reasons and being able to identify these levels is key. Traders do not want to be holding a short position after price has dropped to the key level of support, only to bounce back higher.

The same applies when price approaches a key level of resistance and typically drops lower shortly after. Trend traders typically look for sustained breaks of these levels as an indication that the market may start to trend. Range traders will on the other hand, look for price to bounce between support and resistance for prolonged periods.

3) IS THE TRADE CONFIRMED BY AN INDICATOR?

Indicators assist traders in confirming high probability trades. Depending on the trading plan and strategy, traders will have one or two indicators that complement the trading strategy. Do not fall into the trap of over-complicating the analysis by adding multiple indicators to a single chart. Keep the analysis clean and simple and easy to view at a glance.

4) WHAT IS THE RISK TO REWARD RATIO?

The risk to reward ratio is the ratio of the number of pips that traders will risk in the hopes of reaching the target. According to our Traits of Successful Traders research, which analysed over 30 million live trades, traders with a positive risk to reward ratio were nearly three times more likely to be profitable than those who do not. For example, a 1:2 ratio means that a trader risks half of what he/she stands to gain if the trade works out. The image below further depicts this principle.

5) HOW MUCH CAPITAL AM I RISKING?

It is essential for traders to ask this question. Often traders blow up their accounts by leveraging the account to the maximum when chasing “sure things”. One way to avoid this is to limit the leverage used on all trades to ten to one, or less. Another helpful tip is to set stops on all trades and ensure that the aggregate amount risked is no more then 5% of the account balance.

Before placing a trade, ask yourself, “how much capital should I use?”

6) ARE THERE ANY SIGNIFICANT ECONOMIC RELEASES THAT CAN IMPACT THE TRADE?

Sudden market news has the potential to invalidate the “perfect” trade. While it is almost impossible to anticipate things like, acts of terror, natural disasters or systemic failures in the financial markets, traders can plan for economic releases like NFP, CPI, PMI and GDP releases.

Plan ahead by viewing our economic calendar which highlights major economic releases from the top trading nations

7) AM I FOLLOWING THE TRADING PLAN?

All of the above is of very little use if it does not tie in with the trading plan. Deviating from the trading plan will result in mixed results and only frustrate the trading process. Keep to the trading plan and do not place trades unless the trading checklist has been completed and confirms the trade may be executed.

 

 

TRADING CHECKLISTS: A SUMMARY

• Having a trading checklist does not automatically mean all trades will become winning trades. It will however help traders to stick to the trading plan, trade with more consistency, and avoid impulsive or reckless trades.
• At DailyFX we have dedicated a podcast to the trading plan and how to create one.
• Document your trades and stay accountable with the help of a trading journal.

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Pipscollector.com - Stocks are a key ingredient in the portfolio of millions of investors and traders. They can provide a long-term path towards passive income potentially hitting double-digit returns. But the stock market can also be confusing, and potentially costly or dangerous, with the process of picking the right stocks, at the right time, not always so clear. Read on and discover our guide on how to pick stocks for investors to move towards meeting their goals.

HOW TO PICK STOCKS: STEP BY STEP

There are a variety of crucial factors to consider when approaching the question ‘How to pick stocks’. These considerations can determine the success of a stock portfolio and range from the financial health of the companies chosen, to liquidity and volatility of the stock in question, to wider fundamental events outside the company’s control. Investors should consider all of these influences to have the best chance of building a stock portfolio capable of meeting their goals. Here’s a step-by-step list below.

1. ESTABLISH A PLAN

Establishing a plan is key starting point when picking stocks. You’ll need to consider questions such as how many stocks to buy, what your likely plans are for the money down the line, and whether you’d prefer to trade stocks over the short term rather than invest for a longer-term approach. For example, long-term investors looking to buy and hold stocks for five years or more will obviously have a very different strategy to those looking for short positions in overbought market conditions like we saw frequently in the latter part of the 2010s.

If you’re in it for the short term, find out more on how to create a trading plan for technical analysis.

2. ASSESS YOUR RISK TOLERANCE

Your tolerance for risk will play a key role in determining the kind of stocks to pick. To this point, if an investor is looking for a more risk-averse portfolio, they may want to weigh more towards defensive stocks such as those in utilities or consumer staples. Alternatively, a higher-risk approach could see an investor choosing companies in emerging economies or immature sectors, or companies that depend on key market events going a certain way for their targets to be realized. For example, a pharma company awaiting FDA approval for a new drug will be subject to the risk of that approval not happening – an event potentially devastating to its share price.

Find out more on navigating risk management with our helpful guide.

3. DO YOUR RESEARCH

Attractive stocks can be found in a variety of circumstances, but an investor may get a head start on the crowd if they know a couple of sectors and the companies within them inside-and-out.

Here are some of the key things to consider about the companies behind the stocks being analyzed, as well as the market conditions in which they might be most attractive.

Financial condition

Understand the state of the company’s balance sheet. What are its assets, liabilities, and cash flow situations? Research revenue in recent periods.

Management

Who’s steering the ship and what’s their industry track record? Do they enjoy shareholder confidence?

Innovation

How does the company innovate to stay ahead of and respond to its competition? How have new products and services been received by customers and shareholders?

Dividends

Is the company paying a dividend, and if so, how often and will it be increased? Find out more about how to invest in dividend stocks.

Price and valuation

Is the company undervalued? To find out, calculate the price-to-earnings ratio, or P/E, by dividing the company’s stock price by its earnings per share. A P/E of around 15 may be considered ‘cheap’ – but that doesn’t necessarily mean that it’s worth buying or inexpensive by industry standards. Being cheap may just mean investors lack confidence in its growth prospects. Find out more about how to value a stock.

Liquidity

Does the stock have sufficient trading volume to allow traders to enter and exit the market as straightforwardly as possible? Read more on stock market liquidity for a detailed picture.

Volatility

How volatile has the price movement been for this stock, and what are the reasons for any extreme fluctuations? With volatility naturally comes increased risk, but also potential opportunity. Read more on stock market volatility to discover how to take advantage.

Explore our in-depth guide on researching stocks for more information.

4. USE TECHNICALS AND OTHER TOOLS WHERE APPROPRIATE

If you are trading stocks in the short term, for example as a day trader, swing trader or scalper, you may want to investigate technical analysis tools to try and gauge price action in order to help time entries and exits. These tools include the moving average, MACD and RSI, as well as volume and support and resistance levels.

Naturally, these tools rely on historical price activity to inform choices, so while they can be useful for projecting trends, it is advisable to combine a technical approach with understanding of the fundamental factors that can override patterns and, of course, risk management.

Read more on technical indicators and how they can assist your analysis.

5. PICK THE STOCK AND TRADE IT ACTIVELY…OR JUST WAIT

When it comes to the procedural process of picking the stock for a long-term investment or short-term trading endeavor, the clearest method is often via a trading platform/online brokerage account, which can be set up with proof of ID and a choice of funding method. After that, while short-term speculators may be actively trading the stock, long-term passive investors will usually be waiting it out. For the latter, while there’ll be ups and downs along the way, the mission is to capitalize on growth over a period of many years.

The Best Performing Stocks - Jan 00 to Jan 20

STOCK	GROWTH IN STOCK PRICE JAN 00-JAN 20
Monster Beverage Corporation	73,300%
Netflix	34,400%
Apple	20,000%
Tractor Supply Company	17,000%
Amazon	11,400%

MOST POPULAR STOCKS

As mentioned above, the most popular stocks to trade by volume consistently show up as the likes of giant corporations Facebook, Amazon, Apple, Netflix and Alphabet, but different fundamental events can cause the stocks of various other companies to come out on top in shorter-term trading volume. The chart below shows the stocks with the highest global volume for the month at the end of March 2020.

The leading stock by volume, Greece-based tanker vessel operator Top Ships Inc, grew in popularity as an asset sale saw an influx of funding which allowed the company to greatly reduce its debt. The stock was likely even buoyed by circumstances surrounding the coronavirus pandemic, with surging product demand in areas such as cleaning supplies and paper products leading to increased shipping requirements.

Another company seeing unusually high volume in March was cruise line operator Carnival Corp, much of which was to the short side as the company suspended dividend payments and stock repurchases as voyage suspensions continued amid the coronavirus outbreak.

Rounding out the top three is Ford, which saw a seven-year high in trading volume, again mostly to the short side, as coronavirus decimated production and market demand.

What lesson can stock pickers learn from these examples? When a huge fundamental crisis hits, stocks are affected in different ways. Research on different sectors may shine a light on the industries that could pick up steam when others are going in the other direction. So read up, keep your eyes open, and focus on the goals of the portfolio.

FAQS

How do you decide what stocks to buy?

Deciding what stocks to buy is a multi-faceted process based on factors such as industry knowledge, corporate financials, timing, wider market fundamentals, and in some cases, technical patterns. Investors can put all or some of it together in the effort of building the most appropriate individualized approach.

When should you buy shares?

Timing is everything, but not all oversold shares are ready to be snapped up – after all, they were sold for a reason. Consider the growth potential of the industry and the company within it, and the fundamental factors that might affect its journey along with how that investment or trade may fit with the goals of the portfolio.

Is it worth it to buy 1 share of stock?

It depends on the stock- and the circumstances. Stocks are priced across the board, so owning one share of Berkshire Hathaway has very different ramifications for an investor’s financial position than owning one share of Facebook.

What stocks does Warren Buffett own?

Speaking of Berkshire Hathaway – some of Warren Buffett’s largest investments are currently in financial institutions such as Bank of America and Wells Fargo, consumer brands such as Coca-Cola and Kraft-Heinz, and technology giants such as Apple and Sirius.

How many stocks should I own?

That depends entirely on your plan and the companies you choose. Overall, it’s advisable to aim for a diversified portfolio, with a mixture of growth and defensive stocks, to ensure that risk can be managed effectively.

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Pipscollector.com - Understanding the basics of going long or short in forex is fundamental for all beginner traders. Taking a long or short position comes down to whether a trader thinks a currency will appreciate (go up) or depreciate (go down), relative to another currency. Simply put, when a trader thinks a currency will appreciate they will “Go Long” the underlying currency, and when the trader expects the currency to depreciate they will “Go Short” the underlying currency.

Keep reading to find out more about long and short positions in forex trading and when to use them.

WHAT IS A POSITION IN FOREX TRADING?

A forex position is the amount of a currency which is owned by an individual or entity who then has exposure to the movements of the currency against other currencies. The position can be either short or long. A forex position has three characteristics:

1. The underlying currency pair
2. The direction (long or short)
3. The size

Traders can take positions in different currency pairs. If they expect the price of the currency to appreciate, they could go long. The size of the position they take would depend on their account equity and margin requirements. It is important that traders use the appropriate amount of leverage.

WHAT DOES IT MEAN TO HAVE A LONG OR SHORT POSITION IN FOREX?

Having a long or short position in forex means betting on a currency pair to either go up or go down in value. Going long or short is the most elemental aspect of engaging with the markets. When a trader goes long, he or she will have a positive investment balance in an asset, with the hope the asset will appreciate. When short, he or she will have a negative investment balance, with the hope the asset will depreciate so it can be bought back at a lower price in the future.

WHAT IS A LONG POSITION AND WHEN TO TRADE IT?

A long position is an executed trade where the trader expects the underlying instrument to appreciate. For example, when a trader executes a buy order, they hold a long position in the underlying instrument they bought i.e. USD/JPY. Here they are expecting the US Dollar to appreciate against the Japanese Yen.

For example, a trader who has bought two lots of USD/JPY has a long position of two lots in USD/JPY. The underlying is the USD/JPY, the direction is long, and the size is two lots.

Traders look for buy-signals to enter long positions. Indicators are used by traders to look for buy and sell signals to enter the market.

An example of a buy signal is when a currency falls to a level of support. In the chart below USD/JPY depreciates to 110.274 but is supported at that level multiple times. This level of 110.274 becomes a support level and offers traders a buy-signal for when the price dips to that level.

An advantage of the forex market is that it trades virtually 24/5. Some traders prefer to trade during the major trading sessions like the New York session, London session and sometimes the Sydney and Tokyo session because there is more liquidity.

WHAT IS A SHORT POSITION AND WHEN TO TRADE IT?

A short position is essentially the opposite of a long position. When traders enter a short position, they expect the price of the underlying currency to depreciate (go down). To short a currency means to sell the underlying currency in the hope that its price will go down in the future, allowing the trader to buy the same currency back at a later date but at a lower price. The difference between the higher selling price and the lower buying price is profit. To provide a practical example, if a trader shorts USD/JPY, they are selling USD to buy JPY.

Traders look for sell-signals to enter short positions. A common sell-signal is when the price of the underlying currency reaches for level of resistance. A level of resistance is a price level that the underlying has struggled to break above. In the chart below USD/JPY appreciates to 114.486 and struggles to appreciate further. This level becomes a resistance level and offers traders a sell-signal when the price reaches for 114.486.

Some traders prefer to trade only during the major trading sessions, although if an opportunity presents itself, traders can execute their trade virtually anytime the forex market is open.

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Pipscollector.com - In this article, we’ll explore CPI and forex trading, looking at what traders should know about the Consumer Price Index to make informed decisions. We’ll cover what CPI is as a concept, the CPI release dates, how to interpret CPI, and what to consider when trading forex against CPI data.

WHAT IS CPI AND WHY DOES IT MATTER TO FOREX TRADERS?

The Consumer Price Index, better known by the acronym CPI, is an important economic indicator released on a regular basis by major economies to give a timely glimpse into current growth and inflation levels.

Inflation tracked through CPI looks specifically at purchasing power and the rise of prices of goods and services in an economy, which can be used to influence a nation’s monetary policy.

CPI is calculated by averaging price changes for each item in a predetermined basket of consumer goods, including food, energy, and also services such as medical care.

It is a useful indicator for forex traders due to its aforementioned effect on monetary policy and, in turn, interest rates, which have a direct impact on currency strength. The full utility of knowing how to interpret CPI as a forex trader will be explored below.

CPI RELEASE DATES

CPI release dates usually occur every month, but in some countries, such as New Zealand and Australia, quarterly. Some nations also offer yearly results, such as Germany’s index. The US Bureau of Labor Statistics has reported the CPI monthly since 1913.

The following table shows a selection of major economies and information about their CPI releases.

COUNTRY/JURISDICTION	COMPILING BODY	FREQUENCY OF RELEASES
Australia	Australian Bureau of Statistics	Quarterly
Canada	Statistics Canada	Monthly
China	National Bureau of Statistics of China	Monthly
Eurozone	European Central Bank	Twice monthly
Germany	Federal Statistical Office of Germany	Monthly, yearly
Italy	Istat	Monthly
India	Ministry for Statistics and Programme Implementation	Monthly
Japan	Statistics Japan	Monthly
UK	Monetary Policy Committee	Monthly
US	US Bureau of Labor Statistics	Monthly

WHY FOREX TRADERS SHOULD FOLLOW CPI DATA

Understanding CPI data is important to forex traders because it is a strong measure of inflation, which in turn has a significant influence on central bank monetary policy.

So how does CPI affect the economy? Often, higher inflation will translate to higher benchmark interest rates being set by policymakers, to help dampen the economy and subdue the inflationary trend. In turn, the higher a country’s interest rate, the more likely its currency will strengthen. Conversely, countries with lower interest rates often mean weaker currencies.

The release and revision of CPI figures can produce swings in a currency’s value against other currencies, meaning potentially favorable volatility from which skilled traders can benefit.

Also, CPI data is often recognized as a useful gauge of the effectiveness of the economic policy of governments in response to the condition of their domestic economy, a factor that forex traders can consider when assessing the likelihood of currency movements.

The CPI can also be used in conjunction with other indicators, such as the Producer Price Index, for forex traders to get a clearer picture of inflationary pressures.

WHAT TO CONSIDER WHEN TRADING FOREX AGAINST CPI DATA

When using CPI data to influence forex trading decisions, traders should consider the market expectations for inflation and what is likely to happen to the currency if these expectations are met, or if they are missed.

Similar to any major release, it may be beneficial to avoid having an open position immediately before. Traders might consider waiting for several minutes after the release before looking for possible trades, since forex spreads could widen significantly right before and after the report.

Below is a chart displaying the monthly inflation rates for the US. For the latest month, expectations are set at 1.6% inflation compared to last year’s data. If CPI is released higher or lower than expectations this news event does have the ability to influence the market.

Chart to show US inflation levels in 2018/19. Source: TradingEconomics.com. US Bureau of Labor Statistics

One way the effects of CPI data can be interpreted is by monitoring the US Dollar Index, a 2018/19 example chart for which is below. If CPI is released away from expectations, it is reasonable to believe this may be the catalyst to drive the Index to fresh highs, or to rebound from resistance.

Since the Index is comprised of EUR/USD, USD/JPY, and GBP/USD, by watching the US Dollar we can get a full interpretation of the events outcome.

Chart to show movement in the US Dollar Index. Source: TradingView.com

As can be observed in the example above, as inflation rose during the first half of 2018, the US Dollar Index went up accordingly. But with US inflation drifting lower in the following months and with a missed target of 2%, this pushed US interest rate hikes off the agenda. As a result, the dollar struggled and weakened against a basket of other currencies.

Not every fundamental news release works out through price as expected.

Once the CPI data has been released and analyzed, traders should then look to see if the market price is moving through or rebounding off any areas of technical importance. This will help traders understand the short-term strength of the move and/or the strength of technical support or resistance levels, and help them make more informed trading decisions.

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