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Volatility: Know the Types!

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Many traders think of volatility as simply volatility—something that has no size or shape, just the speed of the movement of a price. However, there are, in fact, different kinds of volatility that trader may face on an Ideal Trading Platform, as found out from FXempire Forex Review. Today we’re going to discuss them. Check them out!

Stock Volatility

When you buy stocks, you’re buying a share of the ownership of a company. The stocks’ prices can change and some of them can be extremely volatile. What you can do is take advantage of that volatility.

When a company’s stock sports high volatility, that company has got to increase its profitability. They must, as time goes by, exhibit an increase in earnings at a faster pace.

Beta, which measures the volatility of a stock, tells us something about the correlation of a stock’s price with a particular benchmark. If the stock’s price moves as the index moves, the beta is said to be 1.0. When it lags behind the index, its beta is lower than 1.0.

In a nutshell, the higher the beta of a stock, the more volatile it is.

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Market Volatility

When we talk about market volatility, we talk about the pace at which the prices change in any market, which include the commodities, foreign exchange, and the stock market.

A market top or a market bottom is near at hand when you see that market volatility is increased, and that means a lot of uncertainty for many traders.

Bullish traders are positive traders, and they usually bid up prices whenever there are good news. Meanwhile, bearish traders are their exact opposites. Bears, along with short-sellers, tend to push prices down whenever there’s bad news.

Price Volatility

Price volatility is a result of a combination of factors, namely seasonality, weather, and emotions. When you see a wild swing in supply and demand, you can associate it to those three factors.

Among those three, emotions can arguably be the strongest influencer. Whenever traders become worried of something, they increase the volatility of whatever asset they are buying, selling, or holding. One example of an asset that’s always affected by traders’ emotions are commodities. They can be subject to geopolitical, economic, or social conflicts, making them a turbulent investment.

Historical Volatility

Historical volatility, as you may have probably guessed, has something to do with a stock’s volatility’s movement over the past 12 months.

 If the stock’s price vary extremely for the past year, it simply means it will continue to be more volatile and therefore riskier. Traders do not often chase after stocks like that.

If you’re holding a stock which has high historical volatility, you might have to wait for some years before you can sell it for a profit.

Traders use a stock’s historical volatility to determine whether it’s on a low point or a high point. Actually utilizing it to earn some profit is quite tricky, though it pays a lot if done right.

Implied Volatility

As opposed to historical volatility, implied volatility pertains to what the traders think, specifically options traders, about the future volatility of an asset.

You can have a glimpse or make an educated guess about the future volatility of a stock by checking out how much the futures options prices differ. When you see the options price rise, the implied volatility rises.

To take advantage of this, you can buy an option on a stock if you believe it will be more volatile. If, luckily, you’re right with your assumption, its price will increase and therefore you can sell it for a profit.

Take Advantage of Volatility

Throughout the years, investors and traders have been devising ways to use volatility in their favor. Some of them have succeeded, some have not. Anyhow, working with volatility requires tremendous risk tolerance, patience, and discipline. You too can devise your own way of benefiting from volatility if you have those qualities.

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