Many analysts and talking heads have been saying that volatile markets provide fantastic, can’t-miss investing and trading opportunities. That is only half true. Yes, rising volatility scares off the weak in favor of the strong, but it’s still a nerve-wracking environment in which to trade. I prefer to follow stock market trends, not volatility.
Why stock market trends trump volatility
The historic trajectory of the stock market is up, period. Crashes have provided those with iron-strong stomachs great opportunities scoop up the bargains of a lifetime – but how many of us are that bold?
When the Great Recession of 2008/09 hit, most of us were left reeling. But the bold traders put on their buying caps. They grabbed Bank of America for $3/share, Goldman Sachs for $58, Amazon for $48, Apple for $14 ($14!) and Netflix for under $3. All of these stocks have moved higher over the years as markets trended higher and volatility declined sharply.
As an investor and swing trader, I’m all in for the big and powerful moves. However, short-term moves due to extreme volatility not only make it tough to get into a position, but you can become victim of the “falling knife” syndrome. I prefer to let a stock stop falling before reaching down and buying after or during a sell-off.
Short-term traders (of stocks, options or futures) must keep a very tight leash on their trades and accept rather modest returns. It is very rare for these traders to get a huge payout. Though options are by definition short-term trading instruments, this is why I will often seek more time for trades to work in my favor.
When stock market trends are up and volatility trends down, you will have more opportunities to buy and hold stocks longer. For now, it’s simply a trader’s market. If you’re not comfortable with the big moves up and down, then the sidelines are a perfectly acceptable place to be.