Some of the best strategies for volatility trading involve closely monitoring the activities of the companies that offer investments. Choosing a mixture of both long-term and short-term stocks can help negate risk. Volatile markets are characterized by short-term fluctuations in the trading value of investments. These fluctuations are typically larger than average.
A basic strategy for volatility trading involves choosing a mixture of both short-term and long-term investments. Stocks or bonds should come from the same industry sector, country, or company size. For example, in a volatile market an investor might want to focus specifically on mid-cap companies. These types of companies are usually medium-sized businesses that have been established for some period of time.
An investor reduces risk with this strategy since he only experiences the fluctuations that may occur in that sector and not the entire market. Price fluctuation differences between long-term and short-term investments in the same sector will typically negate each other. This is because short-term stock market investments tend to experience greater price fluctuations while the average price for long-term investments tends to stay relatively stable.
Other investment strategies for volatility trading involve taking advantage of a company's market activities. For example, if a company is about to merge with another firm, risk can be alleviated by buying stock in the firm that is about to be acquired. If any stock is held in the company that is going to acquire the other, selling those shares is recommended in a volatile market. This strategy capitalizes on the fact that the stock prices are usually lower prior to the completion of the merger.
Keeping an eye out for major activities, such as bankruptcy, insolvency proceedings, corporate restructuring or the liquidation of major company assets can yield great benefits in a volatile market. This is a volatility trading strategy that requires some thinking and evaluation of how the market might respond to the event. Generally, major events contribute to rapid increases and decreases in the price of a company's stock. When employing this strategy, it is important that the investor also understand what is causing or driving the major event.
One of the volatility trading strategies that is considered to carry the least amount of risk is investing in fixed income assets. These types of assets are found in government treasury bonds, low risk money market funds and corporate bonds. Investments that focus on a fixed income strategy strive to maintain the full value of the investment, rather than expose it to potential risk.