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.
In fact, after the attacks of September 11, 2001, volatility jumped to just 33. They closed the markets as a result of the uncertainty! Today, the markets feel subdued, yet are registering volatility in the range of 30. This presents plenty of opportunity for investors to profit.
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 next thing the investor needs is an understanding of volatility. Although Yahoo! Finance provides a neat graphical image (enter “^VIX” in the quote box), it does not give a definition to the term. Simply put, volatility is rate of change in the deviation from the mean. This means that the higher volatility, the more rapidly a price will wander from its 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. He was instrumental in providing the Top Fund Pick of 2010 for the MutualFundSite.org, which was a High Yield Investment. He is bullish on some Bond Funds and cautious on others.