Volatility and trading
One of the most important concepts in the world or trading is that of volatility, and for good reason.
The majority of people who try trading or investing look for volatility, that is to say, that your assets move a lot and very rapidly.
This is more important for those who do short and medium-term trading.
Low volatility investing
On the other hand we have sectors like options sellers or market makers who, obviously, do not like volatility, and prefer stable markets. Those people search for “income”, nor capital.
Curiously, most short-term and intraday traders search for “income”, thinking that they can open a 4000 USD account and make 2000 every month day trading the SP500, but they are mistaken.
What they eventually find out is that they will rather lose 2000 USD per month trying to use sledgehammers to crack nuts. Those traders would be better off looking for “capital”, not “income”. And the best way of finding “capital” is to let run your profits. Although it is easier said than done.
Forex and CFDs market makers, in general, prefer quite markets, since win a lot of money in those circumstances without too much risk.
However, strongly volatile markets are more dangerous because they can bring unexpected moves. As in the options industry, the CFDs or Forex providers are at the other side of the trade and if for any reason, there is a cataclysmic move in an asset and they are caught in the wrong side, they can con bankrupt.
Investing volatility bonds
Other type of actors who do not like volatility are those who invest in bonds and deposits. They just want a stable and smooth income.
The people who hate volatility the most and who yearn for a World without it, are the defenders of socialism or communism; whatever you call it. They just want a World without volatility, that is to say, without financial markets, and with every price set up by them: the bureaucrats.
The problem is that you cannot control all prices without controlling the lives of the people. That is the price you have to pay.
Moreover, those measures do not work anyway, because what they do is creating more volatility eventually.
There is no more volatility than in a asset of a country where all prices are set by the government, like for instance, Venezuela today. They set up prices for all products, control and own the majority of companies (they confiscated them previously) but they have a 2 year bond at more than 60% (yeah, 60%!).
Besides they have a currency that officially depreciates more than 70% per year, but unofficially is crashing at a rate of more than 700% nowdays. In a society like that you have the official rate for the dollar at 6.2 bolivars, but the “street one” is at 630 (it was at 180 five months ago).
That makes a spread of more than 10000%.
I mean, I call it: extreme volatility. Volatility you have never seen in capitalist countries, at least developed countries in normal situations. In those countries, the spread in their assets is normally about 0.01%, not 10000%.
Investors and volatility
Long-term investors look for a stable volatility. They know that there are assets with more volatility than others, and some invest in them, assuming the extra risk.
On the other hand, there are those who rather invest in stable assets and do not like large drawdowns.
The way you measure that volatility is by Beta, which gives you the performance of an asset compared to a reference like the SP500 or any other major index. Investors who look for huge returns and assume high risk should expect assets with high Beta.
Normally, you get high Beta in some technological assets, or small companies, or foreign markets, but nobody invests in markets like Venezuela, whatever the volatility it offers.
In the long-term, it is historically useful to invest in assets with high Beta, as, for instance, Burton Malkiel said is in famous book “Random Markets..”, although we should expect higher volatility and hence, drawdownds.
An investor has to choose what he wants.
Do you want stability and “secure” profits?
Or do you want risk and bigger profits (or loses)?
Short-term trading and volatity
Short-term traders, including day traders and swing traders, search for volatility desperately.
It is obvious that if you are trading in a small time range, where the asset does not have as many chances to a have a significant move as in the long-term, we are interested in explosive moves.
If we are going to do day trading in the SP500 futures, we should expect that that asset moves a lot. We are not interested in days when it moves a 0.2%.
The probability of making money consistently like that are zero.
Day trading volatility
A day trader wants a lot of daily volatility. He wants a DAX that moves a lot and that do in favor of his trade. That is why there are better assets for day trading.
For instance, USDCAD moves a lot less than EURUSD or EURJPY, so day traders should not look for that pair.
A trend trader wants volatility but not at any price. He does not like not trending markets where the price goes up and down very rapidly. He rather wants a tranquil trend trading market. But it has to have some significant move, at least. A 1% move is not what he looks for. They usually will keep their positions for several days, weeks and even months.
A trend trader will tend to chose good trending markets or assets instead of choppy ones.
Volatility is inherent to the existence of markets.
As long as there are markets with different assets, there should be some volatility, which will be healthier the freer the markets are. In such a way that, the more liberty there is in a economy, the less volatility you will get, although it sound contradictory, it is the truth.
Volatility grows as long as governments increase their control. That, actually creates some opportunities to some speculators, whether they are “market speculators” (those who understand the politics of interventionism and their effect on markets) or “public speculators” (those who benefit through the control and corruption). The latter are the majority nowadays and in any society that is entering a socialistic phase.
As the State grows more interventionist and socialist, the “public speculators”, what is to say, those who control de bureaucrats get to overwhelm the overall market, making it impossible in the end, for “market speculators”.
The end of the road is “total regulation”.
But such “total regulation” will, curiously, fail in reducing volatility in the economic fabric of society.
There is no more unstable economic reality and market than any socialist society, like Cuba, Venezuela or Nort Korea.
It is true that you will not be able to trade stocks in the market. That does not exist in Pyongyang or La Habana.
The problem there is that volatility has gone to the street, where you find extreme examples of volatility with a lot scarcity and spreads in the black market, that reach 500, 1000, 3000% or more.
That is real volatility.
If you want to know what real volatility looks like, just go to a communist country and try to make a living there: in the street.