Volatility Isn’t All Glitter! Someone Needed to Say This
For many market participants who are “pro-trading”, you’ll hear common phrases like “the opportunity is in the volatility”.
There’s no wrong about volatility providing opportunities. However, that’s if you’re on the right side of it. Trading is a zero-sum game!
In simple terms, a zero-sum game means that Participant A’s win is equivalent to Participant B’s loss. The money is going to come from somewhere, right?
Being on the wrong side of volatility can cost you a lot, if not your entire portfolio.
Here are some of the dangers posed by extreme market volatility:
Stoplosses can get triggered abruptly: if you’ve traded the market for a while, you must have encountered trades where you got stopped out sharply, only for price to swiftly return above your entry. Situations like this have traders wondering if they should even use stoploss for certain trades. Little advice: never compromise stoploss! You want to keep your trading losses as small as possible regardless of what happens.
Missed stops: it’s not uncommon to hear traders complain that their stoploss got missed while trading on several exchanges. This is usually attributed to technical glitches but this happens when there is extreme market volatility which can lead to price gaps.
When gaps in price action occur, losses could be larger than normal, and could eventually lead to liquidation.
Directionless wipe: When volatility is extreme in both directions, traders who are eager to catch long and shorts get wiped out real quick as the market makes big moves in quick succession. It’s always important to pick a direction (the predominant one) and stick to it.
Uncertainty: when the market is extremely volatile, traders can be tempted to change strategy, timeframes, and systems, thereby playing in terrains they could be unfamiliar with.
Mental Exhaustion: Perhaps you were trading in the right direction but stoploss was too close, or even wide enough - got hit and instantly reversed (witch-hunting). Mental exhaustion can happen when you suffer too many losses. Extreme levels of exhaustion can make people give up on trading and investing.
Takeaway
As a trader, volatility is significant for opportunities, but it comes with a lot of cons you must be familiar with. A trader’s haven would be an optimum level of volatility that creates opportunity without bringing carnage.
Unfortunately, the market speaks the language of violence!