Higher Levels of Volatility Make Day Trading Stocks Preferable

The most important statistic for day traders is volatility. Without volatility, it becomes very difficult to generate day trading profits.  Volatility measures the swings a stock has experienced. What is also important for day traders is intraday swings. The high to low range of a stock price during a trading day is also a key metric. Year to date, volatility in stock prices has remained elevated, but volatility in cryptocurrency prices has dried up.  Higher average levels of volatility in stock prices make day trading stocks preferable to day trading cryptocurrencies.

What is Volatility

Volatility is a statistical measurement that describes the distribution of prices. It is usually associated with large swings in the price of a stock in either direction. Market participants can look at past volatility, known as historical volatility, or future volatility, which is known as implied volatility. Historical volatility tells you about the size of the swings in the price of an asset. This can help you formulate a trading strategy.

Volatility influences day trading throughout the country, and also describes the amount of uncertainty or risk related to the value of a stock. In fact, the VIX volatility index, which is a measure of future volatility is also known as a fear gauge.  Higher volatility means that the future value of a security can have a larger range of values. This also means that the price of the security can change drastically. Lower volatility means that a security’s value will not fluctuate dramatically.

How Can You View Volatility?

There are a couple of ways to view historical-volatility. To see the volatility that has occurred you can evaluate a technical indicator called the Bollinger bandwidth.  This subtracts the Bollinger band high from the Bollinger band low, creating an index that shows historical volatility. You can see that the Bollinger band width for Facebook shares is above average, which means that historical volatility on this stock price is also above average.

Higher than average volatility on a liquid stock such as Facebook compares favorably relative to the low historical volatility seen on Bitcoin. You can see on the chart of bitcoin that the Bollinger bandwidth is well below the 12-month average of 30%. In fact, it appears that the volatility in bitcoin has been well below the 12-month average for all of 2019.

One way to evaluate future volatility of a stock index is to look at a chart the VIX volatility index. The VIX is a measure of the “at the money” implied volatility on the S&P 500 index. When the VIX is climbing, options traders believe that the price of the S&P 500 index will experience increased volatility. When the VIX is falling, options traders believe future volatility on the S&P 500 will decline.

What is Driving Volatility in Stocks?

The volatility in US stock prices continues to be driven by several factors.  The looming deadline for a deal to keep the US government open is fast approaching on February 15.  If no deal is reached, the government will close again. The 35-days that it was closed in late December and January could have reduced US growth up to 0.7% according to the White House. President Trump appears to want to “reset“ the political agenda according to Tradenet.com Head Trader, Meir Barak.

Trade negotiations between the US and China are also creating concern. Day traders like the uncertainty of the market because it gives them the opportunity to use strategies that they know can generate profits. During President Donald Trump’s State of the Union speech, the President discussed the progress that has been made during the trade negotiations between the US and China.

Barak of Tradenet.com says that “Trump’s remarks left current progress of the US-China talks rather speculative, with some investors raising doubts that the two sides will be able to reach an agreement by their self-imposed March 1 deadline”. Without an agreement, there is a chance that the US will increase the penalty on current tariffs. China would then retaliate which would generate additional volatility in stock prices.

Looking Forward

There are several different events that are likely to generate elevated levels of volatility. Trade negotiations between the US and China as well as the spending negotiations between Nancy Pelosi and President Trump are two imminent issues. If both remain unresolved past their deadlines, volatility could rise. While these events are likely to generate volatility in stock prices, they are unlikely to affect cryptocurrency prices. Higher average levels of volatility make day trading stocks a better choice than day trading cryptocurrencies.

For more market analysis watch Barak’s youtube trading channel