By Larry Greenfield
Volatility is a stock traders best friend. In 2008 volatility was extreme, that is a number of trading sessions where buying and selling occurred at levels in excess of normal. In fact, the stock market has a specific indicator known by the short-hand ‘VIX’ or unofficially, “the fear gauge” to monitor this activity. Up until recently levels of volatility have been anemic. Volatility gives the two way trader the ability to profit from market moves wether the indices are trading up or down. The general public and in many cases the novice trader is either ignorant or afraid of trading a downward trending market. Speaking from experience by far my most memorable trades were on the short side of the market. Selling short is borrowing stock in the hope of buying it back at a cheaper price pocketing the difference. It is the riskiest trade because if you are wrong there is unlimited upside to a stock. Downside is limited to zero.
Until proven otherwise we are clearly in the middle of a bullish trend. Every pundit on Television wants to be the one to call the top of the market i.e. that the value of the stock market has reached its height. It can make their careers and for some it has. However, a traders job is to have a clear mind and to take each day on its own merits. There is one caveat though – in the back of your mind you must always be cognizant of the trend which is to the upside. This is the paradox a trader lives with. One of the first things I learned as a trader “trading is not a science” all we can do is try to put the odds on our side.
Most active traders lose more often than they win. Count me among them. So how do you succeed where many fail? Experience is a given but it is the ability to put size on (or more shares on) and differentiate between trades that you like versus trades that you are unsure of. Shorting stocks are an integral part of a traders arsenal but you must take care to be judicious not bet too heavy on the short side.
The recent Ebola outbreak in West Africa which has reached, albeit in very small dose on our shores creates a situation that no trader likes if they already have positions on unless of course they are short the market. The most likely scenario in this instance is a down move. My prediction is that as time goes on these moves will become more fleeting. The market will become increasingly immunized to these news events. All of this is contingent on the information from the medical community that the contagion is not easily spread. European economic and market weakness on the other hand will keep the shorts in play though the overall trend is up.
The bottom line volatility is here to stay for the foreseeable future.