When and how to take advantage of stock market volatility

After what has been an incredibly volatile year for the world’s stock markets, the ride is not over yet.

According to Wells Fargo, markets needed to prepare for a considerable amount of volatility following the US elections on November 3, 2020. The Head of Rates Strategy at the financial services giant has said that while usually election day and the following day are volatile, this could in fact continue for an extended period, once the polls are closed.

Stock Market Volatility

What is stock market volatility?

Volatility in the context of the stock market means that the prices of stocks vary, sometimes significantly, over a short or medium length of time. The volatility index (VIX) was developed in 1993 to measure volatility, all day, every day. To give a general idea, the lowest it measures is 9 and the highest is between 40 and 70.

How to exploit stock market volatility?

From a trading perspective, a popular way to benefit from market volatility is through binary options trading. This form of trading doesn’t involve the purchase of the underlying asset; instead, traders aim to make market volatility work for them through the use of short-term contracts. By speculating on whether a stock index market will increase or decrease, they receive a set payout if they were right, and 0 if they were wrong.

Based on a simple “yes” or “no” question, each trade can be executed 23 hours a day, five days a week. This form of trading makes accessing the markets potentially easier than conventional stock trading, with many platforms such as NadexGO™ offering a free demo account to help prospective traders gain confidence.

Other popular forms of non-asset based trading that may flourish well during volatile periods include CFD trading. This is where the ‘buyer’ pledges to pay to the ‘seller’ the difference between the current value of a stock, and its value at the time the contract expires. Of course, if they were right, the seller pays the buyer instead. While this kind of trading is popular, it doesn’t allow traders the same level of control over their losses that binary trading offers.

What causes stock market volatility?

Volatility is impacted by a variety of things. These can include a major weather event in an oil-producing area, a merger, widespread protests, the collapse of a big national bank, or a hotly contested general election. With the US election and the highly polarised nature of the opponents in the race, this will likely continue to have an impact on the markets.

The increased popularity of stock trading

Over the last few months, the number of new trading accounts has increased by around 300% in the same time frame last year. Driven by increased volatility and better access to mobile devices and the internet, more and more amateurs are starting their trading journey. This trend is expected to increase, particularly as volatility remains the norm.

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