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Volatility vortex: Sharp market moves give wary investors pause as traders make hay

By David Burrows

09:33, 29 September 2022

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In this article:
BDEV
Barratt
4.050 USD
-0.03 -0.740%
RMV
Rightmove
5.50 USD
-0.07 -1.270%
TW.
Taylor Wimpey
1.029 USD
-0.006 -0.580%
GBP/USD
GBP/USD
1.22377 USD
0.00229 +0.190%

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Stock market chart showing volatility. Photo: Getty
Markets have seen huge volatlity of late. Photo: Getty

Markets don’t like uncertainty we are told.

With talk of government policy U-turn; a possible sacking of a Chancellor barely weeks into the job; in addition to a plunging pound (GBP/USD) and a frantic £65bn Bank of England intervention – investors have good reason to be nervous.

And the nervousness is not just confined to UK shores. Last week Japan, took action to defend the yen after the currency fell to a 24-year low against the dollar.

The big price movements in US Treasury bonds have left investors wary of trading in a market that is usually seen as a safe haven during times of stress.

With investors staying away, liquidity in the Treasury market has deteriorated to its worst level since March 2020, according to a Bloomberg index. This poor liquidity tends to intensify price swings, heightening volatility.

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Pound vs dollar (GBP/USD) exchange rate chart

Volatility vortex

As Gennadiy Goldberg, strategist at TD Securities told the FT recently: “Right now it is all about market volatility. You have investors staying away because of the volatility — and investors staying away increases volatility. It is a volatility vortex.”

(The Volatility Vortex is the result of the rise in the Move index, which tracks US Treasury volatility).

While the current environment may be unappealing to long-term investors, day traders are enjoying the volatile conditions, because they are in and out within a matter of hours.

Some investors like unpredictable markets because they provide multiple entry options for short-term investments.

The profits, whether in forex, commodities or equities are achieved by understanding the market volatility and factors that lead to this volatility.

If a price moves a lot in a day, a trader can enter and exit that position swiftly.

Day traders typically focus on price action trading, which often uses data based exclusively on price movement, rather than wider long-term factors.

DE40

14,287.40 Price
+0.050% 1D Chg, %
Long position overnight fee -0.0086%
Short position overnight fee 0.0004%
Overnight fee time 22:00 (UTC)
Spread 3.0

HK50

19,539.00 Price
+2.810% 1D Chg, %
Long position overnight fee -0.0295%
Short position overnight fee -0.0149%
Overnight fee time 22:00 (UTC)
Spread 30.5

US100

11,629.30 Price
+1.230% 1D Chg, %
Long position overnight fee -0.0164%
Short position overnight fee 0.0059%
Overnight fee time 22:00 (UTC)
Spread 3.3

US30

33,775.00 Price
+0.560% 1D Chg, %
Long position overnight fee -0.0164%
Short position overnight fee 0.0059%
Overnight fee time 22:00 (UTC)
Spread 11

Technical analysis tools help predict where a stock’s price might go next.

Successful day trading means not panicking and remaining disciplined and sticking to defined rules.

Buying at the bottom

Panic or forced selling in response to a falling market can of course also provide opportunities for ‘bottom feeders’, long-term investors who buy at a low point when they consider an asset has been oversold.

The herd mentality can see investors pile into an already overheating sector and this mentality can provide day traders with shorting opportunities.

Conversely in times of extreme market volatility – emotion can lead to an entire sector being sold off almost indiscriminately. Essentially, the good is sold with the bad and the investor looking at the fundamentals of each individual asset can bargain hunt. Or, this indiscriminate selling can provide another shorting opportunity for the speculative day trader.

One sector that has taken a major hit of late is property, as Russ Mould, investment director at AJ Bell explains.  “Dragging down the FTSE 100 on Thursday (28 Sept) were stocks linked to the property sector.

“With the news full of stories about the prospect of rising interest rates and mortgage deals being pulled, it’s understandable that some investors want to cut their exposure to anything linked with the sector, for fear that we could see a sharp slump in the property market.

Taylor Wimpey share price chart

“That might explain why housebuilders Barratt Developments (BDEV) and Taylor Wimpey (TW.) and property portal Rightmove (RMV)were down in the dumps on the market”.

These stocks have already taken something of a hit of late – which begs the question are they now significantly below fair value based on the fundamentals of the business rather than the latest news? 

Marketbeat currently rates Barratt and Taylor Wimpey ‘moderate buys’ and Rightmove a ‘hold’.

They may be decent value to long-term investors but not necessarily to day traders who must close their position by market end.   

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

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