Volatility Trading: A Complete Guide

Volatility Trading

Volatility is a measure of how the value of a particular asset or financial instrument varies over time in the trade. Because volatility generates profit potential, it is an important statistic. However, if traders do not obtain the proper knowledge and tactics, volatility trading might result in losses.

Volatility is measured by price activity. As a result, traders are constantly trading volatility and creating it with their operations. Traders can determine if a price move is likely to continue or if it has run its course by examining how far or how quickly prices move.

What is Volatility Trading?

Volatility trading is the practice of trading the volatility of an asset class instead of trading the underlying asset itself. It is a great practice to earn higher profits and play the market fluctuation to gain more. You need to take a detailed risk management approach to minimize the risks and maximize the gains. As volatility is not everyone’s cup of tea, here we are trying to help you to understand volatility trading in depth.

Why is Volatility Important?

Financial markets can be extremely volatile, with big price changes occurring monthly or even daily. There would be nothing of value in the markets if there was no volatility. Volatility is what investors and traders thrive on. Historical volatility helps in measuring price action, through which one can trade volatility profitably.

Although volatility raises the dangers of trading, it can also result in big gains if done correctly. When we talk about volatility, there is a term called implied volatility that also holds big importance. The expected volatility of the underlying asset is referred to as implied volatility.

How to use volatility in trading?

You may design proper trading techniques that help you exploit profit potential by knowing volatility. Trading volatile assets, analyzing changes in volatility to improve selection, implementing volatility-based technical indicators or algorithms, or focusing on low-volatility assets are all ways to do this.

How to use volatility in trading

Options are a common technique for trading volatility. In other words, the predicted future volatility of an option’s underlying instrument has a significant impact on the option’s value. Instruments with a higher predicted future volatility are generally more valued than instruments with a lower expected future volatility.

Volatility is a crucial indicator for all traders, especially short-term day traders and swing traders who are primarily interested in daily and weekly price changes. Non-volatile markets, on the other hand, are those in which prices vary very slowly or do not change at all.

So, how do you trade volatility? Volatility can be traded in a variety of marketplaces and timeframes. We’ll look at volatility trading methods that may be used on stocks, currency, and commodities.

How to Measure Volatility?

The standard deviation, which represents how far the current price trades away from its mean or moving average, has traditionally been used to measure volatility. The volatility of financial markets can be influenced by a variety of variables. News stories, macroeconomic statistics, earnings reports, as well as political and national economic variables can all influence volatility.

Central bank monetary policy meetings can potentially have a significant impact on volatility. If a central bank cuts interest rates, for example, markets may retaliate strongly, with the domestic currency sinking and the stock market rising in anticipation of increased corporate profitability.

Volatility Trading Strategies

Volatility traders are not concerned with the direction of price movements. They earn from increasing volatility, regardless of whether the price rises or falls. Quantitative trading strategies also help a lot in options trading and stock trading.

In the next section, we’ll show you how to use pending orders or options to profit from market volatility with the Straddle method.

Volatile stocks for day trading

A trader can quickly open and exit a position if the stock price fluctuates a lot in a day, especially if there are a lot of volumes. This is one of the reasons why volatile equities, in particular, are so popular for day trading.

A day trading technique can be utilised in any trending stock, but it tends to provide better results in volatile stocks because higher price changes mean the target move is more likely to be met.

Trade Volatility with Options

Traders can trade volatility using options in addition to breakout trading. Options can also be used successfully with the Straddle technique. An investor can buy a call option and a put option with the same target price and expiration date when trading volatility with options.

If the price of the underlying instrument rises significantly, either the put or call option will become a profit. The call option would be in-the-money if the price rose, while the put option would be in-the-money if the price fell.

Volatility breakout trading strategy

On a trading chart, a breakout occurs when the price of an asset moves past support and resistance levels, indicating a new trend direction. Technical indicators such as the average true range (ATR), which measures how much an asset generally moves in each price candlestick, are one approach to measure volatility breakouts.

There is only a potential trade when the ATR passes above the simple moving average. For a better opportunity, the price should be crossing above or below previous swing highs or lows. This helps to weed out instances where the ATR surpasses the moving average, but the price doesn’t move much.

Trading leveraged products in volatility

Traders can trade on margin while trading volatility on our platform. Leveraged products have the potential for higher earnings, but they also have the potential for higher losses.

While traders prefer the prospect of more gains, opening a bad trade with leverage may be disastrous, and volatility adds to the problem’s severity. As a result, you should always have a stop-loss or exit point in mind when trading.

Straddle Strategy 

One of the most common tactics for profiting from heightened volatility in any market direction is the Straddle Strategy. When the price moves strongly in one trend, whether up or down, the staddle strategy method pays off. As a result, this technique is most effective when utilized during periods when a significant rise in volatility is expected, such as before major market reports.

The EUR/USD pair has entered a gradual recovery with moderate volatility, as shown in the chart. Buy stop orders may be placed a few pips above higher resistance, and sell stop orders could be placed a few pips below lower support by a volatility trader. One of these pending orders will be triggered by a price shift in either direction and if the volatility continues, the trade will profit.

When certain pre-specified criteria are met, pending orders become market orders. When the market hits a well before price from below, a buy stop order becomes a buy market order, and when the market hits a pre-specified price from above, a sell stop order becomes a sell market order.

Unlike the Straddle strategy, which requires the trader to write or sell a call and put option with the same strike price and expiration date, the Short Straddle strategy needs the trader to write or sell a call and put option with the same strike price and expiration date. If there is no volatility in the market, the trader can salvage value on both the call and put contracts.

Quantitative volatility trading

To profit from changes in volatility, quantitative volatility trading employs computer programs and algorithms. Because software is used, a strategy can be applied in much quicker periods, or more transactions can be executed than a human can.

MT4 can be customized and includes a variety of indicators for tracking and anticipating volatility fluctuations. Furthermore, MT4 allows automated trading systems.

How to trade low volatility?

How to trade low volatility

All traders are not interested in trading volatile markets and price movements. The majority of long-term investors prefer tranquil markets. Day traders, on the other hand, can benefit from low volatility by acting as market makers or someone who fills buy and sell orders as needed to keep the market liquid. Throughout the day, they make money by buying at lower prices and selling at higher prices.

You can easily ace volatility trading with the world-known broker ABinvesting. It is a well-equipped broker that offers all resources and trading tools required for efficient volatility trading. 

How do get benefit from a Volatile market?

You may learn to manage volatility to your advantage while minimizing risks with a disciplined strategy.

  1. Before you try to trade in unpredictable markets, be sure you’re mentally and strategically equipped to deal with the higher risks. The idea is to maintain your overall risk exposure while reducing the likelihood of being stopped out prematurely owing to larger-than-normal intraday price changes.
  2. Trends aren’t always erased by market volatility. Certain equities may continue to move in a certain direction but at a larger risk.
  3. Profits can dissipate and turn into losses in unpredictable markets, so look for strategies to lock in extra gains when you can. One option here is to reduce the profit target for certain of your positions. Alternatively, if your stock is rapidly rising, consider selling a portion of your stake while keeping the rest to profit from any subsequent gains.
  4. Traders are attracted to price movement because it offers the possibility of greater earnings. However, there’s always the possibility that prices will move faster than usual.
  5. Sitting on the sidelines isn’t a bad option if you’re not sure where the markets are going. Volatility spikes come and go, and they’re usually short-lived. It’s possible that the smartest transaction is to make none at all.

Bottom Line

When using leverage, volatility trading has the ability to increase large returns but also large losses. Risk management is essential whether you’re trading in a volatile market or not. Stop-loss orders should be used at all times, and the demand for these execution tools grows as volatility and/or leverage rises.

After major market reports, volatility is common, especially if the released number does not match market expectations. Volatility trading is a terrific approach to identifying sound investment opportunities in the market without having to be right on the price direction.


What does Volatility mean?

Volatility is the market condition when short-term price movements occur at any particular time. These price movements lead to fluctuation in the market that affects the overall market sentiment. 

Is trading volatility profitable? 

Yes, it can be a highly profitable trading strategy. Whether that market is going up or down, volatility is a cup of cake for short-term traders who like to take advantage of significant small price movements. 

What causes volatility?

The major causes of volatility are supply and demand imbalances, political scenarios, market sentiment, economic factors, changes in the leading position of the company (CEO or board of directors), and more. 

How to trade in volatility? 

Volatility trading is the step by step process. You need to make sure that you follow this process very carefully. 

  1. First, you need to discover your ‘Why’ before executing any trade. What is your objective behind picking the particular stock?
  2. Second, try to choose trending stocks. 
  3. Look for breakouts and smart trading strategies that we have discussed above. 
  4. Fetch some larger gains.