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Volatility can be an investor’s worst nightmare but a trader’s best friend.
During years of tranquility in markets, stocks and other assets grow steadily at a meager rate. When markets become volatile, they grow rapidly and then crash back down to reality even faster. It is these moves that can wipe out the life savings of the inexperienced investor. But it is also when traders are most profitable and have the most price action to work with.
PrimeXBT research shows that although the pandemic is nearing its end, volatility could be here to stay for the next several years. Here’s what volatility analysis and market cycles say about the next few years of stocks, crypto, commodities, and more.
Volatility Defined: Comparing Volatility Across Asset Classes
Volatility, by definition, is the “liability to change rapidly and unpredictably, especially for the worse.” In finance, it more directly refers to the statistical measurement of price movements across any given timeframe. The wider the price swings and the more wilder it gets, the higher the volatility.
The higher the volatility in any asset, the more risk is often associated with that asset. Due to how volatile Bitcoin, Ethereum, and other cryptocurrencies are, they are often considered the highest risk asset class.
Cryptocurrencies are subject to extreme price movements due to equally extreme changes in sentiment and speculation. Stocks are traditionally less volatile, as are commodities. Due to the enormous trading volume and liquidity of the forex market, it is among the least volatile, and is why leverage is typically required for traders to extract profits.
Crypto assets can rise thousands of percent in ROI, only to drop 90% and wipe out most of those returns. Other markets don’t behave that way, and a 30% move in the major stock indices would be considered shocking.
But which of those two scenarios would a trader armed with long and short positions prefer and make for a more profitable environment? The answer is obvious and perfectly explains why volatility is more of an opportunity than something offensive.
Future Financial Forecast: Cloudy With A High Chance Of Volatility
Forecasting volatility isn’t easy. No one knows when investor sentiment will suddenly shift or a world-changing scenario comes into play like the COVID pandemic. However, several tools exist that can help to predict what’s to come.
For one, the Bollinger Bands are a volatility-measuring tool based on a simple moving average and two standard deviations acting as upper and lower bands. When these bands tighten or “squeeze” as it did in the example above, it suggests volatility is low and when low volatility breaks, an explosion results.
But the Bollinger Bands are a short-term volatile forecasting tool, able to call out moves across days, weeks, and potentially months. However, the VIX, a volatility index based on the expected volatility in the S&P 500, could help forecast more extended periods of volatility and turmoil in markets.
The chart below shows the long-term VIX dating back to before the dot com bubble bursting. When the VIX rises and bounces above a reading of 16, it often signals enormous volatility in markets. The VIX remained elevated for several years, eventually falling into a period of tranquility once again.
The calm eventually came to a shocking end as the VIX rose to the highest level historically and brought with it The Great Recession and one of the worst phases for the global economy in recent history. Markets were more volatile than ever, but eventually, quantitative easing began, and markets finally settled down.
PrimeXBT Research And Seizing The Opportunity Ahead
The VIX became nearly as elevated as The Great Recession with the onset of COVID, but more stimulus money to the tune of trillions sent asset prices soaring to new all-time highs. However, the VIX is now bouncing and holding at the all-critical level that often leads to a recession or at least several years of extensive market volatility.
Central banks might again try to combat any market collapses with more quantitative easing, and as history has shown, it could work to sustain markets longer. But when this balancing act breaks, markets could see mayhem for many years to come.
Such volatility might be hellish for investors but can be a once-in-a-lifetime opportunity for a trader in their prime. Using this intel from PrimeXBT and the trading tools the award-winning platform provides, anyone can prepare for the storm ahead and turn it into profits instead of losses.
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