Riding the Beast: Volatility Is Your Best Friend

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By Jacob Maslow

stock volatilityA lot of investors completely panic when they come across the word ‘volatility’ in financial reports. This really is too bad. If you are looking to meet your target returns in any given time period, you have to look for volatility. Volatility means that there is a lot of action in a particular stock or sector. That is all it means. Unfortunately, too many investors assume volatility with only one outcome. They instantly assume that if there is volatility in a particular stock, sector, or even a time period within the market generally, they would end up on the losing side.

This completely ignores the great opportunity for volatility. Even if you do end up on the losing side of a trade, you can do dollar-cost averaging to ensure that you can ride the volatility to a positive outcome. For example, if you can see that a stock is see-sawing up and down and you try to get in at the next dip, it turns out that the stock continued to dip some more, you can do dollar-cost averaging to get near the bottom. When you do dollar-cost averaging, you lower your break-even point dramatically. Depending on how much you scoop up at the lower price point, it can only take a small uptick for you to not just recover your money, but come out way ahead. This is where volatility can truly pump a lot of dollars to your bottom line.

Again, if there is volatility in a stock, as long as there is no clear indication that the underlying company will go bankrupt, you are still in play. It is still a good idea to ride the up-and-down motions of the stock to greater and greater profits. It is not uncommon for heavy traders to ride just one stock’s volatility to generate a huge return in an incredibly short period of time.

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