The stock market is marked with strong volatility coming into the market at various points, causing the prices to move rapidly either upward or downward depending on the prevalent market condition. Often stock traders hoped to benefit extensively from this volatility especially when they trade stock as CFDs using online brokers.
The major challenge for traders here is handling this volatility, especially when the market goes against their predictions. Managing these conditions would require the use of proper risk management strategies from the trader to protect his positions against so much loss. This work has therefore discussed the most important risk management strategies obtainable today that the trader could employ to protect himself against the stock market volatility whenever he makes wrong predictions in the market.
Understanding the meaning of volatility in stock market trading
Volatility when it comes to stock market trading refers to rapid price movements either upward or downward, depending on the prevalent market conditions. The major reason why traders indulge in stock trading is to benefit from the upward price movements when they buy stocks on the spot positions. Traders who trade stocks as CFDs are more interested to capture price movement in either direction when they long or short the market.
What are the major factors that drive volatility in the stock market today?
The major factors that drive volatility in the stock market are fundamental factors such as:
- Interest rate hike
- Tapering
- Major news about the company’s growth and development
- Government policies
- Disruption of economic activities due to wars or lockdowns
- Quantitative easing
- Economic crisis including a recession
Important ways of handling the stock market volatility today
The most viable option available for traders to handle the stock market volatility especially when the market goes against their positions is to apply the proper risk management strategies while taking positions in the market today. We have discussed some of these risk management strategies below.
- Setting a Stop loss: One important practice that protects the trader from losing his whole capital in cases of strong market volatility is the use of stop loss. Setting a stop loss takes the trader out of the market at a lower loss in such cases of extreme market volatility.
- Placing a take profit target: Setting a take profit target helps to close up the trader’s open positions whenever the market hits a resistance level and chooses to reverse from there.
- Having enough equity for trading: Having enough equity for trading often increases the trader’s chances of survival in cases of strong market volatility, especially when he is not using a big lot size higher than his account size.
- Use of correct lot size: Choosing the correct lot size due to one’s account size for trading, is always necessary for withstanding the stock market volatility when trading stocks as CFDs. Thus, each account unit has a lot size marked out for it for CFD trading.
- Hedging: This strategy involves taking two different positions at once in the market. While trading stocks as CFDs, the trader could open an opposite trade to his initial position such as going long and short at the same time. The second position is usually set as a pending order to be activated when the market moves rapidly against the initial position.
- Making proper analysis before taking positions: Making a proper analysis before taking positions in the market helps the trader to reduce his chances of taking a wrong position in the market. This helps to place him in the right direction whenever the market moves rapidly in a given direction.