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For anyone who has been invested in the markets over the past two years, it should come as no surprise to discover that market volatility, as measured by the Chicago Board Options Exchange, has risen from the range 16 to nearly 80, the highest level ever recorded.
In fact, after the attacks of September 11, 2001, volatility jumped to just 33. They closed the markets as a result of the uncertainty! Today, the markets feel subdued, yet are registering volatility in the range of 30. This presents plenty of opportunity for investors to profit.
For the individual investor, the first thing that needs to happen is to strip away the emotion from the investment. This is challenging, however, and for good reason. Most investors have worked extremely hard to build a nest egg, and watching a volatile market eat it up without providing any tangible benefits is extremely difficult to stomach. One solution is trading software, which is a lot like a money manager in that it does not know or care how many hours or sacrifices one had to make in order to save such a nest egg.
The next thing the investor needs is an understanding of volatility. Although Yahoo! Finance provides a neat graphical image (enter “^VIX” in the quote box), it does not give a definition to the term. Simply put, volatility is rate of change in the deviation from the mean. This means that the higher volatility, the more rapidly a price will wander from its mean price.
The last thing an investor needs to do is tame the beast known as greed. This is a difficult thing to do since short term returns give us a taste of just how much we might make if we stay invested just a little longer for just a little more money. By using trading software, investors are better able to remove the emotion since the software will study concrete factors like volatility, moving averages, momentum, and so on whereas investors study the profit and potential for more.
To summarize, taking emotion out of the investment equation and relying on technical measurements that give strong probabilities as to the direction of a stock, traders can use volatility to profit. Used properly, a trading system can assist with the emotional side of a trade and can provide strong signals for entry and exit points.
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