July 23, 2020

MANAGING VOLATILITY: HOW TO PROFIT FROM STOCKS WITHOUT COMING UNSTUCK

MANAGING VOLATILITY: HOW TO PROFIT FROM STOCKS WITHOUT COMING UNSTUCK

The last few years have provided us with a series of unpredictable political and social events that have led to high levels of volatility in the stock markets. In the past four years alone, we have witnessed the Brexit vote in 2016, the inauguration of Donald Trump’s presidency in 2017, and a global pandemic in 2020. In each case, these events have gone against expectations and provoked wild market movements.

These are certainly challenging times, but current events offer traders equipped with the right knowledge and tools an opportunity to profit handsomely. Of course, volatility is a double-edged sword: traders can just as easily incur losses. So how can they capitalise on the opportunities while managing risk and protecting their assets?

Why volatility is lucrative

When we consider recent events that have impacted the global stock markets, traders have been given an abundance of opportunities to capitalise on the volatility. Stock prices for companies have risen and fallen astronomically owing to the far-reaching effects of the pandemic, where some have coped better than others.

Social media is one area where investment is particularly interesting because these companies are liable to grow rapidly. For example, despite already being well-established as one of the social media giants, Twitter saw its shares almost triple in value on the AvaTrade platform between July 2018 and July 2019 jumping from just above US$15 to a peak of around US$45.

When we consider recent weeks, traders could have made a generous profit on Snapchat had they bought its shares ahead of the announcement that it would stop promoting posts from US President Donald Trump. Following this announcement towards the end of June, Snapchat’s shares shot up 11% on the AvaTrade platform.

The other side of the coin

On the other hand, not all tech-based companies are finding it easy at the moment. Uber was one of the most falling stocks in the same week as Snapchat rose, dropping by 8.3%. Taxi services have understandably struggled during lockdown, so this is more than likely to be the reason for Uber’s decrease.

The ride-hailing company also issued a statement around this time that all passengers need to wear facemasks which, although an admirable safety measure, may have contributed further to its drop in market value, as other taxi companies have not followed suit.

It can be relatively easy to read market reactions in hindsight, as we’ve done here. But doing so in the moment is far harder. Traders could conceivably have purchased stocks in Uber following the face mask announcement in the belief that this decision would encourage better consumer trust in the company and increase its worth. As we have seen, however, traders would have stood to make a significant loss on this call.

Undoubtedly, market volatility can be lucrative, but being able to manage risk is also critical.

How to protect assets

While an ear to the ground and a good nose for market movements will serve traders well, not everyone can rely on years of experience, nor can they necessarily be confident in any given situation, particularly given the unpredictability of today’s markets.

To address these worries a number of risk management tools have been entering the field, offering an extra layer of security for traders. These tools can be useful for both experienced traders wanting to execute strategies in riskier climates and those relatively new to the trading world looking for additional support.

There are a number of different forms of protection available to traders. For instance, AvaTrade is one of a number of brokers that offer “take profit” and “stop loss” orders. These see traders define price points at which the system will automatically sell their asset in order to lock in profits or cut losses. This can be a valuable tool for ensuring traders make rational decisions and don’t hold onto positions for too long, risking a favourable position going sour or a bad position getting worse.

Other tools, such as AvaTrade’s AvaProtect, even go so far as to offer total protection against loss for a defined period. This approach sees the trader simply check a box to take out protection on an asset in exchange for a small fee based on the size and risk of the position. This means that if a strategy does not perform as well as initially expected, traders can recover any and all losses on the trade, minus the initial cost of taking out the protection.

As with every sector, advancements in technology continue to evolve in the trading space and, with access to the right tools, traders can feel confident that they can profit from the market without taking on too much risk.

Certainly, 2020 will continue to be a tumultuous and challenging year, especially economically. Upcoming political events, such as the US elections and a possible Brexit trade deal later in the year, combined with the ongoing impact of the coronavirus, are likely to keep triggering market shifts. For traders – armed with the tools to keep a tight grip on risks – this will mean further opportunities to profit.

Originally published on financederivative.com

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