Is Volatility Good For Daytrading?

The month of September, 2011, brought more sell-off and with it, greater volatility. The last week of September closed out the month of trading for the Nasdaq with a loss of 7% and a quarterly loss of 14%. For the Nasdaq, this meant their eighth downtrending week out of the last 10 weeks of trading. The Dow Jones Industrial Average (DOW) dropped 6% for the month, and for the the entire quarter, was down 12%. This is the worst quarter since March of 2009. At the end of the quarter, the CBOE Volatility Index closed at 42.96. With so much volatility, does this prohibit daytrading?

According to Wikipedia, volatility is defined as “a measure for variation of price of a financial instrument over time but with the last observation on a date in the past.” Investopedia sums it up well by saying, “volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.” With the uncertainty in Europe, especially Greece, Spain, Portugal, Italy and Ireland, risk is definitely the operative word.

But does uncertainty necessarily translate to the inability to daytrade? In a nutshell…no. In fact, the more uncertainty, the more apt daytraders are to capitalize. The only time there can be no daytrading is when the market is flat, something stocks have not seen in months.

Can daytraders benefit when markets become increasingly volatile?

Daytraders, retail and institutional, normally play significant roles in the market’s activity by providing intra-day liquidity (the degree that a security is bought or sold in the market without affecting the asset’s price). Why? Because daytraders are prone to enter the market almost in unison using similar technical strategies for buying and selling. They respond to common signals with indicators such as MACD, Stochastics, and Moving Averages. Trading in common adds daily liquidity and volatility as if in spurts. Add to already high volatility unscheduled reports of economic / geo-political uncertainty. Common signals suddenly magnify stock price fluctuations, yielding even more volatility.

For daytrading, magnified stock price fluctuations translate directly to trading opportunities. Dramatic downswings followed by equally dramatic upswings offer short-term investment opportunities. During the course of the day, daytraders go long (buying — betting that the price of the stock will go up) and then selling. They quickly reverse direction, going short (selling — betting that the price of the stock will go down) and close their trades quicly. These Daytraders make money in both directions, back and forth, all day long. The more unscheduled geo-political reporting, the more upswings and downswings, the more daytraders are profitting.

Remember, the only time daytraders can not make money is when the market is flat. With intense volatility, constant unscheduled economic reports, the more daytraders thrive.

Don’t be afraid of a volatile market…jump in — the water is fine!

Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to shadowsupport@shadowtraders.com or call 866-617-2037 today.

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