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How to Trade Shares Using Stock Volatility

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When stock price fluctuates, regardless of its overall course, remarkable investing opportunities can arise for traders. Using stock volatility to make short-term buys and sells can be very profitable as long as price continues rising and dropping. Below is some information on how to trade shares of stock using volatility.

Stock Volatility in Investing

Volatility in investing is a stock’s ability to change. Stocks with high volatility are those that can easily change in price (greatly and quickly), meaning that they are easily affected. Securities with lower volatility are more resistant to change, and they tend to have a stable course. With great potential for return, volatile stock is also accompanied by much risk. Generally, securities that trade with volatility often fluctuate greatly over short periods of time, as it takes very little to affect the prices of these shares. When the price jumps up and down, short-term trading opportunities that allow investors to buy during dips and sell when price bounces up arise.

How to Trade Shares of Stock Using Volatility and Fluctuations

Regardless of the overall course of a security (whether or not it seems to by uptrending or downtrending), short-term trades can be very profitable when price jumps around. The key to success is to buy when a stock is at one price, and sell at a higher one, which is much easier when the price moves based on a stock’s volatility, causing fluctuations that, on a chart, resemble sharp mountain peaks and valleys.

Often, the best thing to do to make money is buy when stock rises slightly after a downtick, and sell when it turns around after rising. This means buying rising stock and selling falling stock. So, when price drops down, and then starts to turn around, buying early as it rises will lead to gains if it can be sold for any price higher (if the commission can be beaten).

For this, after it rises, and turns to start falling, shares will need to be sold at falling prices that are higher than the rising prices paid for shares when stock began rising. This is much easier when volatility is great, and fluctuations in price are also great.

Risk and Trading Using Stock Volatility

The above technique requires very large trade sizes or very frequent successful short-term investments to bring in significant returns. It is a strategy that can work very well for scalpers, who rely on stock prices getting up at least past the purchase price in high volumes of quick trades.

Unfortunately, however, there is never any guarantee that a stock will not drop down greatly after being bought, and then trade below the purchase price even if it fluctuates greatly there. This can mean a lost investment, but as long as good trades outnumber the bad ones, and the commission is still beaten, money is made investing.

Trading stocks that seem to bounce around, with highs and lows staying in the same range over the short term is best, as such stocks are very likely to rise above purchase prices when they are taken on low, and then drop down after rising up, triggering sells, and, after bottoming, creating new opportunities to buy. Learning how to trade shares based on stock volatility means getting these buy and sell prices down, based on any given security’s action.

This article provides general information. Do not rely on it as personal, specific investment advice.

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