What is Volatility? The Ultimate Guide IG International

Posted January 31, 2025

Generally, you can take advantage of daily fluctuations with continuous trading operations on intraday strategies. In view of good money management, however, the ideal solution is to balance these trades with medium-long term strategies. Despite being a very technical term, the concept it expresses is very simple. Over time, the value of a financial instrument can fluctuate due to a myriad of factors (macroeconomic, geopolitical, social, etc.) that affect the supply and demand relationship.

If you’re trading in commodities, you’ll have to contend with market volatility in commodities as well. There may be several global economic indicators or market conditions that affect prices of commodities. Recessionary scenarios also lead to lower demand for industrial metals and various other commodities, while oil price fluctuations are usually the first result of any geopolitical instability. Unlock the secrets of volatility trading with our comprehensive course designed for traders seeking to capitalize on market fluctuations. Volatility is a key driver of price movements, influencing strategies across various asset classes.

When markets get jittery and investors go into “risk off’ mode, for instance, when stocks get bearish (start trending down), bonds can step in as a favoured asset. Government bonds, high-rated corporate debt, and bond ETFs, which tend to pay income, can offer ongoing returns without the rollercoaster ride of equities. And now, younger investors have started getting in on bond ETFs more than ever, as these can signal a shift toward stability. It’s not a wild ride like stocks and crypto, but in times of uncertainty, a little predictability can go a long way. A more dynamic strategy is to use a trailing stop-loss, such as a 20-period moving average, which allows the trader to capture large trends should they develop.

For example, whenever there is higher inflation, gold prices automatically get a boost. Higher rates of interest may oanda review reduce commodity prices due to lower demand (on account of costlier borrowing). GDP growth, on the other hand, may enhance both demand and production, making commodities costlier and vice versa. You can also dive deeper into supply and demand analysis and trends for various commodities along with seasonal trends and the like. You will observe that commodity prices are often denominated in U.S. dollars (USD), meaning that a stronger dollar will lead to commodities becoming costlier for foreign buyers.

Ways to trade volatility

Low-volatility markets offer a different set of challenges compared to high volatility. However, with the right strategies, traders can still find opportunities in quieter markets. Big decisions are frequently the result of unexpected outcomes, whether favorable or unfavorable.

Options Trading

We may be compensated but this should not be seen as an endorsement or recommendation by TradingBrokers.com, nor shall it bias our broker reviews. Join iFOREX to get an education package and start taking advantage of market opportunities. Oil has been particularly volatile for several years, but then, on best forex trading books for beginners November 30th 2016, OPEC agreed on the first oil production cuts in 8 years.

High volatility makes technical analysis and forecasting more difficult because the market can behave erratically. The market depends a lot on the emotions and behavior of investors. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Discover the range of markets and learn how they work – with IG Academy’s online course. Trading the VIX is largely going to centred around your perception of forthcoming economic and/or political instability.

What is volatility trading?

The views expressed are as of the date indicated and may change based on market or other conditions.
In this article, we will learn together about volatility and explain how you can exploit it in trading.
This is why any volatility, even a market crisis, can be viewed as an opportunity.
Let’s say a company’s cryptocurrency was worth $100, but due to positive news it grew to $120 in just a week.

Prices often move within a certain range in markets with low volatility. Traders are able to recognize levels of support and resistance, buy at the low end of the range, and sell at the high end. Dividend-paying stocks offer something that growth stocks don’t — cash flow. Sectors like utilities and consumer staples might not be exciting, but they can deliver steady payouts and tend to be less volatile than tech stocks. Over time, dividends can add up to a significant chunk of total market returns.

Monthly Momentum Strategy (ETF Sector Rotation Strategy In EEM, SPY, And TLT)

The higher the volatility index, the more extreme the price changes. Overleveraging (when you borrow too much capital relative to your account balance and increase risk exposure) will naturally increase risks for commodity futures. For instance, a 10x leveraged trade in crude oil may completely wipe out your account in case of a small movement in prices. Leverage only what you can afford to lose and use diversification and stop-loss orders to reduce your risk exposure. Another risk management strategy in the commodity market is setting a stop-loss order strategically. This will help prevent excessive losses in case of major fluctuations.

And amid all this, reoccurring budget talks have contributed to investor uncertainty.
If the price moves a lot in a day, especially with lots of volume, this means that a trader can enter and exit the position easily.
When the indicator is above a level of 50, this means that volatility is on the upside.
For traders, volatility is an opportunity for profit, as high price fluctuations can open up the potential to enter and exit trades with large profits.

Interest Rate & Currency Risk

A perfect example of this is the Dow Jones, compared with the S&P 500. Given the relative value of each market, it makes sense that traders will see substantially larger movement in terms of points or ticks for the Dow – currently around 23,000. Volatility trading can be a profitable way to make money in the markets. One advantage is that it doesn’t matter whether or not the market swings up or down. Some investors can use volatility as an opportunity to add to their portfolios by buying the dips, when prices are relatively cheap. Market volatility can also be seen through the Volatility Index (VIX), a numeric measure of equity market volatility.

Why trade volatility with us?

Want to understand how volume influences price movements and identify potential trading op… While traders like the chances of increased profits, opening an unsuccessful trade using leverage can be catastrophic, and volatility increases the magnitude of the problem. For this reason, you should always trade with a stop-loss or exit point in mind. As a general guideline, when a major stock index such as the S&P 500 is experiencing above average market volatility, the individual stocks within the index will also see more volatility.

Investors frequently go towards ichimoku kinko hyo safe-haven assets like gold or the US dollar out of fear of the unknown. If hostilities increase, stock markets may experience a significant decline. Prices can move in unforeseen directions, even when there are rumors of conflict or changes in policy. Gold has been the go-to hedge against economic chaos for centuries because when everything else crumbles, gold tends to hold its ground. Prices have been resilient lately, hitting many new highs, and with uncertainty in the air, having some exposure to gold could possibly be a smart defensive move. It won’t make you rich overnight, but it can potentially help to protect your wealth when markets are in meltdown mode.

This is a strategy to use when you expect the volatility of a security to increase. You can accomplish this by buying a call option and a put option on the same security. The two options also must have the same maturity date and strike price to work correctly. The more the price of a security moves, the more likely it is that you will lose money on the stock as well. The greater the volatility, the higher the market price of options contracts across the board.